U.S. Treasury yields moved lower on Wednesday after softer-than-expected inflation data gave bond markets some relief following a month-long sell-off.
The latest U.S. Personal Consumption Expenditures, or PCE, report came in below expectations. As a result, traders reduced some bets on another Federal Reserve rate increase.
U.S. Treasury Yields Fall After PCE Data
Treasury yields declined across the curve shortly after the inflation data was released.
The benchmark 10-year Treasury yield, which had been trading around 5.244%, fell by 3.8 basis points to 5.206%.
Short-term yields also moved lower.
The two-year Treasury yield dropped 2.4 basis points from 4.893% to 4.869%.
Meanwhile, the 30-year Treasury yield eased 1.5 basis points to 5.562% after trading close to 5.577% earlier in the session.
September Still Marks a Sharp Rise in Yields
Despite Wednesday’s pullback, Treasury yields remain sharply higher for the month.
The 10-year yield is on track to rise by nearly 50 basis points in September.
That would mark its biggest monthly increase in almost two years.
Heavy U.S. government debt issuance and persistent energy-driven inflation have continued to weigh on longer-dated bonds.
These pressures have pushed investors to demand higher yields for holding long-term government debt.
PCE Inflation Comes in Below Expectations
The decline in U.S. yields accelerated after the Commerce Department released its August PCE inflation report.
The PCE index is closely watched because it is the Federal Reserve’s preferred measure of inflation.
Core PCE, which excludes food and energy prices, increased 0.2% month-on-month.
Economists had expected a 0.3% rise.
On an annual basis, core PCE slowed to 3.0%, below the 3.3% forecast.
Headline Inflation Also Cools
Headline PCE inflation also came in below expectations.
The annual rate slowed to 2.6%, compared with a consensus estimate of 3.7%.
On a monthly basis, headline PCE increased 0.3%, below the 0.4% forecast.
The softer figures reduced some concerns that the Federal Reserve would need to raise interest rates again immediately.
Fed Rate-Hike Expectations Ease
The latest inflation data supports a more cautious approach from the Federal Reserve.
New York Fed President John Williams recently said there was no need for urgency when considering another rate increase.
The softer PCE report strengthened that view.
As a result, traders lowered some expectations for an October rate hike, helping Treasury prices recover and pushing yields lower.
Two-Year Treasury Yield Remains Under Pressure
Even with Wednesday’s decline, short-term Treasury yields remain elevated.
The two-year yield recently touched its highest level since 2002, approaching 4.96%.
For September, it has risen by more than 50 basis points.
That move reflects expectations that the Federal Reserve could still raise rates again before the end of the year.
Because the two-year yield is highly sensitive to monetary policy expectations, it has reacted strongly to changing interest-rate forecasts.
Global Bond Yields Have Also Surged
The rise in bond yields has not been limited to the United States.
European government bond markets also experienced significant selling pressure during September.
Benchmark German and French yields climbed to their highest levels in 17 and 18 years, respectively, before stabilizing.
In Asia, Japanese 10-year government bond yields also remained elevated.
The quarter saw Japanese borrowing costs rise by more than 40 basis points as markets continued testing the Bank of Japan’s yield curve policy.
Bond Markets Remain Focused on Inflation and the Fed
The latest PCE report has provided temporary relief for U.S. Treasuries.
However, bond markets remain sensitive to inflation, energy prices, government debt issuance, and Federal Reserve policy.
While softer inflation has reduced immediate pressure for another rate hike, yields remain close to multi-year highs.
Investors will now watch upcoming economic data and Federal Reserve commentary for more clues about the direction of U.S. interest rates.
