Yields drop despite higher inflation, after supply passes

NEW YORK: Bond yields fell on Friday as investors remained wary that inflation will increase even as consumer prices rose more than expected in August, and after the US Treasury on Thursday completed $108 in supply this week with a solid 30-year bond auction.

The Labor Department said on Friday its consumer price index rose 0.4% last month, marking its third consecutive monthly increase.

But yields fell after the data, with the 10-year note yields last down one basis point on the day at 0.676%.

"You have to take (the data) with a grain of salt, because there's a lot of dislocation that's going on because of the virus and the lockdown," said Lou Brien, a market strategist at DRW Trading in Chicago.

The 10-year yields reflect pessimism that the Federal Reserve will be able to lift inflation, despite fiscal stimulus and ongoing quantitative easing, Brien said.

Ten-year yields are "the dog that didn't bark," he said. "The last three consumer price index numbers were stronger than expected, and I think that it's interesting that in spite of that the 10-year is still sitting right around 0.67%."

Bond yields also fell after the Treasury on Thursday completed long-dated supply that has weighed on the market this week.

The next major focus will be next week's Fed policy meeting, where the US central bank will update its economic projections. Investors will also be watching for any new details on its new framework that will include allowing inflation to run higher than previously before raising interest rates.