Long-dated yields fall, curve flattens

Longer-dated US Treasury yields fell on Thursday, flattening the yield curve as a smaller-than-expected increase in the consumer price index in April reduced fears that domestic inflation is picking up steam as the labour market tightens.
The 10-year Treasury yield fell to a session low of 2.948 percent after having broken through the psychologically significant level of 3 percent on Wednesday.
The two-year yield, which is particularly sensitive to market sentiment about interest-rate hikes, was up from late Wednesday, suggesting traders did not believe CPI data was sufficiently weak to derail the planned rate hike in June.
"I think June is pretty much 100 percent baked in and so that's what we're seeing particularly in the short term," said Paula Solanes, portfolio manager at Silicon Valley Bank Asset Management in San Francisco.
The overall effect was a flattening of the yield curve, in which shorter-dated yields rise faster than those at the long end. The spread between five- and 30-year yields fell to a session low of 28.3 basis points, near the post-financial crisis trough reached on April 30.
The Labour Department reported its consumer price index rose 0.2 percent in April after slipping 0.1 percent in March. Excluding the volatile food and energy components, the CPI edged up 0.1 percent after two straight monthly increases of 0.2 percent. The so-called core CPI rose 2.1 percent year-on-year in April, matching March's increase.
Core inflation remains low because wages have not risen substantially even with jobless claims near a 48-year low. Real average hourly earnings were flat in April, and rose just 0.2 percent year over year, the Labour Department also reported on Thursday.
Some analysts remained nonplussed. "We think this is a temporary aberration," said Candice Bangsund, vice president and portfolio manager, global asset allocation at Fiera Capital Corporation in Montreal. "At a time when the economy is operating at full employment, this will inevitably place upward pressure on wages."
Also pressuring the long end of the curve was the strong demand for $17 billion of new supply of 30-year bonds
auctioned on Thursday afternoon. The bonds sold at a yield of 3.130 percent, the highest for this maturity at an auction since March 2017, Treasury data showed.
The yield on benchmark 10-year Treasury notes was 2.970 percent, down 3.4 basis points from late Wednesday. The 30-year yield was 3.119 percent, down 3.5 basis points, while the two-year yield was last at 2.534 percent, less than a basis point above late Wednesday.