U.S. Treasury yields closed off their session lows, with a slight moderation in the earlier bull-steepening move across the yield curve. Treasury futures surged during early trading, led by short and intermediate maturities, which pushed short-term yields down by approximately 8 basis points by the close. The softer-than-expected U.S. June inflation data prompted markets to shift towards more dovish monetary policy expectations.
Short-dated Treasuries led the gains, causing the 2s10s and 5s30s yield spreads to widen by 5 basis points and 4 basis points for the day, respectively. The yield on the benchmark 10-year U.S. Treasury note settled around 4.585%, marking a decline of roughly 4 basis points on the day.
The bulk of the bond market's advance occurred following the release of the June CPI figures. Gains were spearheaded by short-term bonds as markets further pushed back their expectations for Federal Reserve interest rate hikes. By the close, markets were pricing in only about 6 basis points of tightening for the Fed's July meeting, down from 12 basis points priced before the CPI data. For the December meeting, expectations were adjusted to roughly 33 basis points of total hikes, a reduction from the prior estimate of 44 basis points.
Trading volume in August federal funds futures hit a record of 540,000 contracts as investors recalibrated their outlook for the Fed's policy path in response to the economic data. Overall U.S. Treasury futures volume was 70% above its 20-day average, while activity in August federal funds futures was running at three times the usual pace.
As of the afternoon close in New York, key Treasury yields were as follows: the 2-year yield at 4.185%, the 5-year yield at 4.3137%, the 10-year yield at 4.5834%, and the 30-year yield at 5.0959%. The yield spread between 2-year and 10-year notes stood at 39.64 basis points, while the spread between 5-year and 30-year bonds was 78.22 basis points.
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