Bond Report: Treasury yields rise, putting 2-year back at highest since 2008

Treasury prices fell, nudging yields higher, on Thursday, a day after fears sparked by a fresh round of tariffs from Trump administration had fueled buying in assets perceived as havens.

The yield on the benchmark 10-year Treasury note TMUBMUSD10Y, -0.06% rose 0.9 basis point to 2.853%, the 30-year Treasury bond TMUBMUSD30Y, -0.25%  added 0.5 basis point to 2.950%.

The two-year Treasury note yield TMUBMUSD02Y, +0.96% edged 1.6 basis points higher at 2.594%, retouching its loftiest rate since late July 2008, according to WSJ Market Data Group.

The bond market keyed into a report on inflation, which suggested price pressures were picking up throughout the economy. This is likely to keep the Federal Reserve on track to raise rates two more times this year. Inflation for June came in at a 0.1% increase, below the consensus estimate of 0.2% based on economists polled by MarketWatch. But on a year-over-year basis, consumer prices were climbing at an annual pace at 2.9%, a six-year high.

“The overall picture is one in which just about every facet of the economy is starting to generate price pressures. There will still be monthly fluctuations here, but by and large the distribution of price increases is more balanced than it has been in a long time. That’s good evidence that strong economic performance will over time push broad prices higher,” said Eric Winograd, senior economist for AB.

That report comes a day after the producer-price index, which measures prices that businesses receive for their goods and services, rose 0.3%, above the 0.2% expected from economists polled by MarketWatch.

The lack of a substantial selloff suggested investors mostly ignored the bearish implications of rising price pressures. Inflation can chip away a bond’s fixed value and provide some impetus for Fed policy makers to quicken their pace of rate increases. Both are factors that might drive debt prices lower and yields higher.

That’s because market participants see the recent burst of inflation as a temporary phenomenon. Lackluster wage growth and the danger of a trade war are two of the reasons preventing prices from taking off.

“Global trade tensions may dampen global growth, in turn, dampening inflation on a more long-term basis,” said Brendan Murphy, head of global and multisector bonds at Standish.

See: Why is the bond market shrugging off a six-year high in inflation?

Separately, jobless claims for the period ending in July 7 fell by 18,000 to 214,000, below the MarketWatch forecast of 226,000.

Philadelphia Fed President Patrick Harker said he only supports one more interest rate increase this year even after the recent data showed inflation was now running at its fastest pace in six years. Cleveland Fed President Loretta Mester said on Wednesday the economy was strong enough to handle two more rate hikes this year.

Concerns over trade tensions linger, however, and the flight to safety assets like government bonds has moderated, with global stocks, including the Dow Jones Industrial Average DJIA, +0.91%  and the S&P 500 index SPX, +0.87% closing higher Thursday.

Late Tuesday, the Trump administration said it would assess additional tariffs on $200 billion on a variety of Chinese goods, including bicycles, sound systems, refrigerators, pocketbooks, vacuum cleaners, cosmetics, tools and seafood. Those tariffs follow $34 billion in duties of 25% enacted against Beijing and Washington last week, with China vowing to respond in kind to the latest $200 billion salvo.

Speaking to the danger of a trade war, Fed Chairman Jerome Powell warned higher tariffs could hurt the U.S. economy. One particularly problematic scenario, he said, would be if inflation was climbing at the same time as the economy slowed down.

Haven assets, including the dollar DXY, +0.10% have drawn bidding because markets fret that the trade clash between the U.S. and its partners across the world could hurt global economic expansion.

Many industry participants, however, hold out hope that trade disputes can be resolved amicably. Bloomberg reported that U.S. and Chinese officials are open to resuming high-level trade talks.

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