Yields on most U.S. Treasury bonds and notes fell to their lowest levels in more than a week on Tuesday on month-end buying and after U.S. inflation data reinforced doubts that the Federal Reserve would raise interest rates more than one more time in 2017. Purchases of U.S. government debt for month-end portfolio rebalancing was the main catalyst for the move lower in yields, analysts said. Also, a drop in the core PCE price index to 1.5 percent in the 12 months through April from 1.6 percent in March reinforced views that the Fed might not raise rates again after June and contributed marginally to the yield drop.
While the core PCE price index bounced back 0.2 percent after dipping 0.1 percent in March, the dip in the year-over-year reading stoked investor concerns about recent low U.S. inflation prints. The core PCE, which excludes food and energy, is the Fed’s preferred inflation measure and the central bank has a 2 percent target. Yields on U.S. Treasuries maturing between three and 30 years hit their lowest levels in 12 days. Benchmark 10-year U.S. Treasury yields touched 2.211 percent and 30-year yields hit 2.881 percent.
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Three-year yields, which are considered more vulnerable to Fed rate hikes, hit 1.432 percent. “More than anything, we’re seeing just a little bit better buying here at a month-end extension,” said John Briggs, head of strategy Americas at RBS Securities in Stamford, Connecticut. While the U.S. inflation data weighed further on investors’ expectations for Fed rate increases this year past June, it did not alter expectations for a rate hike next month, with rates futures on Tuesday last implying traders saw a nearly 89 percent chance of a hike next month from about 88 percent on Friday according to CME Group’s FedWatch tool.
“The market is realizing that this underlying inflation that the Fed is sort of looking at to hit targets, we’re not hitting those and it looks like we’re topping out,” said Justin Hoogendoorn, head of fixed-income strategy at Piper Jaffray in Chicago. Fed Governor Lael Brainard said Tuesday she is most concerned with a lack of progress in pushing inflation up toward a 2-percent goal in recent months.