Treasury Yields Slip Below 1.5% Ahead of Auction, Inflation Data

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Treasury Yields Slip Below 1.5% Ahead of Auction, Inflation Data

(Bloomberg) -- The 10-year Treasury yield fell below 1.5% for the first time since May 7 as traders appeared to continue an unwind of short positions.

The benchmark retreated before an auction of notes at the tenor, falling as much as 4 basis points to 1.494%, and ahead of key U.S. inflation data due Thursday.

There was no clear catalyst for the latest move lower, suggesting a potential shift by the market’s large short base ahead of the U.S. data and a European Central Bank meeting Thursday.

Positioning for higher yields based on expectations for an inflationary economic recovery has been unprofitable over the past two months. The 10-year note’s yield peaked at about 1.77% in March and fell as low as 1.46% on May 7 after the release of weaker-than-forecast employment data.

The drop in yields, which has come in the face of signs that the Federal Reserve is moving toward tapering its asset purchases, comes before a policy meeting next week. Before that though, the market has to navigate the May Consumer Price Index, which economists expect to show an acceleration.

“I don’t think even a slightly stronger number changes the narrative too much for the June Fed meeting, which is one where they will start to talk about talking about tapering,” wrote NatWest Markets strategist John Briggs in a note this week about the upcoming data.

The drop in yields is not confined to the U.S., with those in Germany the most negative in a month.

“Rates markets appear remarkably robust,” said ING strategists including Antoine Bouvet. “It is clear that the market is pricing in the extension of the ECB’s accelerated asset purchase pace as a base case.” The ECB’s pandemic bond-buying program targets around 20 billion euros ($24 billion) a week.

(Updates throughout)

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