U.S. Treasury prices climbed during the American morning session, following the release of producer price data that came in below expectations, extending the trend of soft inflation figures seen with Tuesday's CPI report. Gains accelerated after comments from Federal Reserve official John Williams, who stated that while inflation remains too high, there are "encouraging signs" to expect it has peaked. A significant curve trade involving 5-year and ultra-long Treasury futures during the U.S. trading session helped sustain the steepening move.
Shortly after 3 p.m. New York time, yields fell across the entire curve by 2 to 7 basis points, with short-term and intermediate bonds leading the advance. The 2-year/10-year and 5-year/30-year yield spreads widened by approximately 2.5 basis points and 4 basis points on the day, respectively.
The market's premium for Federal Reserve rate hikes continued to recede in swap markets, providing support for the short end of the curve and contributing to the widening spreads. By the market close, pricing for the July policy meeting implied just a 3 basis point hike, with the cumulative implied rate increase by year-end standing at 26 basis points.
The majority of the price gains occurred after the release of the PPI data in the early U.S. session. This report bolstered market optimism that U.S. inflation has peaked, extending the bullish curve-steepening trend initiated by Tuesday's weak consumer price figures.
Around 4:25 p.m. New York time:
The U.S. 2-year Treasury yield fell 5.2 basis points to 4.1409%.
The U.S. 5-year Treasury yield fell 5.7 basis points to 4.2641%.
The U.S. 10-year Treasury yield fell 3.8 basis points to 4.5513%.
The U.S. 30-year Treasury yield fell 1.9 basis points to 5.0855%.
The U.S. 5-year/30-year Treasury yield spread increased by roughly 3.5 basis points to 81.97 basis points.
The U.S. 2-year/10-year Treasury yield spread increased by approximately 1.6 basis points to 40.83 basis points.
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