Yields dip after inflation data only just meets expectations

NEW YORK: US Treasury yields fell on Thursday morning after a measure of underlying inflation just managed to hit the Federal Reserve's 2 percent target for the third time this year.

The year-on-year increase in the so-called core PCE - the personal consumption expenditures price index excluding the volatile food and energy components - rose 0.2 percent after edging up 0.1 percent in June. That lifted core PCE to 2.0 percent, from 1.9 percent in June.

Thursday's print of the Fed's preferred inflation measure, however, only just hit the central bank's target. "It was a low 0.2 percent for core PCE at just 0.156 percent," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. A "near miss some might say, and a troubling trajectory for the Fed to be sure."

Yields, particularly on the two-year note, typically rise along with inflation expectations as the market anticipates the Fed will hike rates to manage inflation.

While Thursday's data reaffirms the market's belief Chair Jerome Powell will raise rates in September, there was "overall, little to inspire a new trading direction, which conforms with the slight bid we've seen in the wake of the data," said Lyngen.

The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4 percent last month after advancing by the same margin in June, pointing to strong economic growth early in the third quarter. Personal income, however, grew 0.3 percent, missing expectations of 0.4 percent slightly and below June's 0.4 percent growth.

"The consumer is definitely spending more than what they're making," said Mary Ann Hurley, vice president, fixed income trading, D.A. Davidson. "The savings rate is also continuing to go down, which is worrisome to me."

Wages have remained stubbornly low, even economic growth and inflation have risen, and Thursday's data likely contributed to the fall in 10-year yields, which reflect traders' view on the overall health of the economy.

Yields on longer-dated bonds fell more than those with shorter-dated maturities, flattening the yield curve for the third day in a row. The 10-year note yield was last at 2.864 percent, down 1.6 basis points from Wednesday's close. The 30-year bond yield was down 1.3 percent over the same period, last at 3.008 percent.

The yield on the two-year note was down 1.2 basis points from yesterday's close, last at 2.665 percent. The spread between two- and 10-year note yields, a measure of the shape of the yield curve, narrowed to 19.9 basis points, from 20.7 on Wednesday.