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Markets

Yields dip as inflation stays benign, stocks weaken

  • Core inflation rose 0.2% on the month but remained at 1.2% on the year, below the Fed's target of 2%.
  • I think broadly speaking the market's really focused on the core year-on-year," said Subadra Rajappa, head of US interest rate strategy at Societe Generale in New York.
14 Jul, 2020

NEW YORK: US Treasury yields fell on Tuesday after data showed that core inflation remained well under the Fed's target and as stocks opened lower.

US consumer prices rebounded in June after three straight monthly declines as businesses reopened, but the underlying trend suggested inflation would remain muted and allow the Federal Reserve to keep injecting money into the ailing economy.

Core inflation rose 0.2% on the month but remained at 1.2% on the year, below the Fed's target of 2%.

"I think broadly speaking the market's really focused on the core year-on-year," said Subadra Rajappa, head of US interest rate strategy at Societe Generale in New York. "Markets (are) coming to the realization that inflation is perhaps going to be well below the 2% target for the foreseeable future."

Weaker stocks also added a bid for safe haven bonds. Wall Street opened lower following a mixed bag of quarterly earnings from US lenders and simmering tensions between Washington and Beijing, while new coronavirus restrictions in California hit tech stocks for a second straight day.

Benchmark 10-year yields fell three basis points to 0.609%. The yield curve between two-year and 10-year notes flattened one basis point to 45 basis points.

Yields on 10-year Treasury Inflation-Protected Securities (TIPS) fell two basis points to minus 0.81%.

These yields, which are known as "real yields" as they adjust for impact of expected inflation, have dropped from minus 0.40% at the beginning of June on rising inflation expectations.

The move also reflects concerns about growth going forward, said Rajappa.

"You're looking at negative 80 basis points in real yields. It doesn't really send a very positive sign on real growth over the longer run," she said.

Concerns about growth also come as the US government racks up a record deficit as it spends on coronavirus relief programs and sees a drop in individual and corporate tax receipts.

Data on Monday showed that the US federal budget deficit in June surged to $864 billion from single digits a year earlier. The June deficit brought the year-to-date fiscal deficit to $2.7 trillion, far eclipsing the previous full-year record of $1.4 trillion in 2009.

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