- Investors awaiting an auction of 30-year government debt shrugged off a report showing an increase in US consumer prices in December amid rising gasoline costs.
- In the 12 months through December the CPI advanced 1.4% after increasing 1.2% in November.
NEW YORK: US Treasury yields slid on Wednesday after Federal Reserve officials pushed back against tighter monetary conditions anytime soon, even with the prospect of higher inflation ahead.
Investors awaiting an auction of 30-year government debt shrugged off a report showing an increase in US consumer prices in December amid rising gasoline costs, as underlying inflation remained tame amid the COVID-19 pandemic, which has hit the labor market and the services industry.
The Labor Department said its consumer price index increased 0.4% after gaining 0.2% in November, with an 8.4% jump in gasoline prices accounted for more than 60% of the CPI rise.
In the 12 months through December the CPI advanced 1.4% after increasing 1.2% in November.
Yields on the 10-year note jumped about 20 basis points in the past week through Tuesday on expectations that new fiscal stimulus will boost economic growth and increase Treasury supply after Democrats won control of the White House and Congress.
But yields on the benchmark Treasury note dropped to 1.110% in early trade, down from an almost 10-month high of 1.187% on Tuesday.
The CPI report was relatively in line with expectations, although the market's outlook on inflation is now at its highest level since 2018, said Kevin Flanagan, head of fixed income strategy at WisdomTree Investments Inc.
"When you're looking at the future, though, with respect to the CPI numbers, the year-over-year comparisons are going to begin to weigh in favor of that reflation trade," Flanagan said.
Inflation readings last year in March, April and May were very low, which could lead to upside surprises when year-on-year comparisons are taken into account in the months ahead, he said.
"It does appear that the stars are in alignment for perhaps a move to the 1.25% and 1.5%," he said.
All signs point to rising US inflation though the Federal Reserve won't preemptively react to higher consumer prices by tightening policy, St. Louis Federal Reserve President James Bullard said Wednesday at the Reuters Next conference.
The money supply has "exploded," fiscal deficits are "off the charts" and a hot economy may either already be here or "just around the corner," Bullard said.
But the Fed needs to regain credibility on inflation after it has underrun the central bank's 2% target for the last decade, he added in the interview.
Investors in the past week have pushed yields higher in anticipation the Fed could begin raising rates as soon as 2023. That would be earlier than previously expected.
Fed speakers this week have pushed back at speculation that they are close to curbing bond purchases or raising rates.
Boston Federal Reserve Bank President Eric Rosengren said Tuesday that it may be years before inflation reaches the Fed's 2% target, suggesting the central bank may need to maintain the pace of its asset purchases through at least the end of 2021.
Cleveland Federal Reserve Bank President Loretta Mester also said on Tuesday that it is too early to talk about adjusting monetary policy or changing the pace or scale of the Fed's asset purchases with coronavirus cases still rising.
The yield curve between two-year and 10-year notes pared recent gains to 96.20 basis points.
Thirty-year bond yields slid to 1.849% from a high of 1.915% on Tuesday, the highest level since March 20.
The Treasury Department will sell $24 billion in 30-year bonds on Wednesday. It saw strong demand for $38 billion in 10-year notes on Tuesday.
Five-year note yields fell to 0.490%, down from Tuesday when they traded at the highest since March 26.