US Treasury bond prices have risen as declining oil costs have improved the inflation outlook.
On Thursday, yields across various maturities fell by 2 to 3 basis points, reaching their daily lows during the early US trading session. Concurrently, European bonds also moved higher.
Oil prices have been volatile due to the uncertain prospects for a US-Iran ceasefire. Reports of a key meeting this week between officials from the United Arab Emirates and Iran have overshadowed the impact of former President Trump's threats to seize a critical Iranian oil hub, leading oil prices to resume their downward trend.
The effect of oil price movements on the bond market was complicated by the release of US inflation data. The figures showed that producer price increases for May exceeded economists' forecasts. However, the core price measure, which excludes food and energy, rose less than anticipated.
"Many people have told us they believe the worst of the inflation data is behind us," said Tony Farren, Managing Director of Institutional Sales and Trading at Mischler Financial Group. He noted that despite rising energy costs, the lower-than-expected core inflation "has at least temporarily changed the mindset in the Treasury market."
US Treasury prices have shown little change this week. This follows a shift in market expectations for Federal Reserve policy prompted by strong employment data released on June 5th. The Fed's policy-setting Federal Open Market Committee is scheduled to meet next week, marking the first policy meeting since Kevin Warsh succeeded Jerome Powell as Fed Chair.
It is widely anticipated that Fed officials will maintain the target range for the federal funds rate at 3.5% to 3.75%, a level that has remained unchanged since last December. However, the Fed's quarterly projections for interest rates and the economy may reflect the impact of the surge in energy prices triggered by the Iran conflict. Many investors expect a 25-basis-point rate hike before year-end and see a high probability of another increase before mid-2027.
Thursday's market rally lowered the expected yield for the 30-year Treasury auction scheduled for 1 p.m. New York time, which is the third and final long-term bond sale this week. This follows strong demand in the auctions for 3-year and 10-year notes over the preceding two days. The market reference yield for the 30-year auction had earlier exceeded 5.04% during the session before retreating to just below 5%.
Last month's 30-year Treasury auction yielded 5.046%, marking the highest issuance yield for that maturity since 2007. On May 20th, as inflation accelerated and the US economy and stock market showed strength, a growing consensus that the Fed would hike rates pushed the 30-year yield to its highest level of the year, nearing 5.20%.
The European Central Bank announced an interest rate increase on Thursday, its first of 2023. The move, which was widely expected, was described as necessary by ECB President Christine Lagarde, given the energy price shock.
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