Bond Report: Treasury yields turn lower as month-end buying offsets strong inflation data

Treasury price rose, pushing yields lower, on Monday after month-end buying offset data showing inflation had climbed to 2%, the Federal Reserve’s long-term target.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -0.44% was down 2.2 basis points to 2.936%, trimming the monthlong climb to 19.6 basis points.

The 2-year note yield TMUBMUSD02Y, +0.17% was up 0.2 basis point to 2.488%, extending the monthlong rise to 21.6 basis points. While the 30-year bond yield TMUBMUSD30Y, -0.12% fell 2.9 basis point to 3.097%, cutting the monthlong rise 12.2 basis points.

Bond prices move in the opposite direction of yields.

What’s driving the market?

Analysts suggested higher bond prices may have come on the back of month-end buying as money managers up on government paper to maintain the average maturity of their portfolios. When debt rolls off a bond fund portfolio, the average maturity will fall, drifting away from the maturity of their competing benchmark index.

Stock market investors may have also taken refuge in government paper after major equity benchmarks including the S&P 500 SPX, -0.82%  slipped in Monday’s session to end April on a down note in what was a strong month for equities.

The buying helped to offset the news that personal-consumption expenditures inflation, the Fed’s preferred gauge for rising prices, hit 2% year-over-year in March from a 1.7% pace in February, in line with economists’ expectations. It also matched the central bank’s 2.0% target that would keep the central bank on its gradual trajectory of raising rates. Core PCE inflation climbed to 1.9% year-over-year, its biggest yearly gain since April 2012.

See: The dam isn’t about to burst, but prices are rising under the Fed’s watchful eye

Stronger price pressures can erode the value of bonds’ fixed-interest payments, putting Treasurys under pressure in most circumstances. Analysts said the strengthening inflation data reflected how an unusually weak raft of inflation numbers in 2017, which had suppressed the yearly figures, were now being phased out.

As a result, more investors are shifting to the view that the central bank will retreat from the consensus of three further hikes to a more aggressive four, with the fed -fund futures market showing that traders see the chance of four or more rate increases already close to 50%, according to the CME Group’s FedWatch tool.

Economists are expecting no rate increases from this week’s two-day Fed meeting, which ends on Wednesday.

Read: Fed will make 4 rate increases this year, economists say after latest GDP, ECI reports

What did market participants’ say?

“With Fed officials confident in the near-term economic outlook, they will be more focused on the stronger than anticipated pick-up in core PCE inflation this year, reaching 1.9% in March. We think that will convince the Fed to raise rates a total of four times this year, with the next hike coming in June,” said Michael Pearce, a senior U.S. economist at Capital Economics, in a note.

What are other assets doing?

The 10-year German government bond yield TMBMKDE-10Y, -1.83%  was down a basis point to 0.562%. Investors see German sovereign paper as a haven asset that trades closely with Treasurys, and as a proxy for the eurozone’s economic health.

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