(Bloomberg) — A rally in the Treasury market lured investors to a sale of 30-year securities after new economic data bolstered bets the Federal Reserve will cut interest rates more than policymakers anticipate.
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Yields across the maturity spectrum declined on Thursday, with most reaching the lowest levels since early April after the auction drew strong demand. Five- and seven-year yields declined as much as 10 basis points, and all yields remained lower by at least 7 basis points after the sale.
Market-implied expectations for rate reductions beginning as soon as September increased, deepening a rift between investors and the central bank, which this week projected a more-conservative course.
Separate reports showed the rate of increase of wholesale prices unexpectedly slowed in May, while new jobless claims jumped to the highest level of the year. Fed policymakers, who on Wednesday projected they’d cut rates by a single quarter-point increment this year, less than their previous quarterly forecast, are awaiting indications of lower inflation, labor market weakness — or both — before they act.
The wholesale price data follow a report on consumer price trends released before Wednesday’s Fed meeting that also showed unexpected deceleration.
“You’re definitely seeing more signs of disinflation and a softening labor market with the data this morning,” said Zachary Griffiths, head of US investment grade and macro strategy at CreditSights. “This, combined with yesterday’s CPI print, certainly strengthens the case for the Fed to move sooner rather than later.”
Inflation expectations implied by the yields on inflation-indexed bonds declined further. For five-year Treasury inflation-protected securities, the average consumer price inflation rate needed to break even with higher-yielding regular Treasuries dropped to about 2.17%, the lowest since January.
“The inflation bump of the first quarter is fading out,” said Ed Al-Hussainy, rates strategist at Columbia Threadneedle Investments. “You can see breakeven markets sniffing this out.”
Fed policymakers also revised up their expectations for inflation in the projections released this week, however. For the PCE price index, which they’re aiming to bring down to a 2% rate from 2.7% in April, they projected a year-end rate of 2.6%.
Thursday’s gains lowered the yield investors received in the latest monthly auction of 30-year Treasury debt. The $22 billion auction was awarded at 4.403%, about 1.5 basis points lower than the yield in pre-sale trading at 1 p.m. New York time, the bidding deadline, a sign that demand exceeded dealers’ expectations.
Other demand metrics for the auction were strong too, with primary dealers awarded a historically small share relative to other categories of bidders that include more long-term holders. Also, the bid-to-cover ration was the highest in a year.
The $22 billion auction was a reopening of last month’s $25 billion new issue, meaning the bonds being sold pay the same fixed rate and mature on the same date as the existing ones, making them identical. Their yield peaked this week at around 4.60% on Monday.
–With assistance from Michael Mackenzie.
(Adds 30-year auction results and updates yield levels.)
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