(Bloomberg) -- Treasuries rallied as a report on producer prices suggested that Wednesday’s selloff sparked by hot consumer inflation data was overblown.
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The advance trimmed some yields by nearly 10 basis points, erasing most of the previous day’s surge. Even before the January producer price index was released, interest-rate strategists at JPMorgan Chase & Co. said investors should buy two-year Treasury notes after Wednesday’s selloff pushed yields toward the high end of the recent range.
“It’s a relief rally,” said Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management. Elements of the PPI suggest that the Fed’s preferred gauge of consumer inflation, to be released near the end of the month, will be more benign than the CPI was, she and others said.
The market’s recovery produced gains for those who bought 10-year Treasury notes in Wednesday’s auction, and curtailed demand for this week’s final coupon auction, $25 billion of 30-year bonds sold at 1 p.m. New York time. The bonds were sold to yield 4.748%, about 1.2 basis points higher than the indicated level just before the bidding deadline, a sign that demand fell short of expectations. On Wednesday, the indicated yield for the auction was as high as 4.85%.
Treasuries retained the bulk of their gains despite the auction results. Trump administration officials, who’ve been issuing regular threats to impose tariff on trading partners since taking office three weeks ago, said reciprocal tariffs would be announced in an event at 1 p.m. that 20 minutes later had yet to begin. CNBC reported that the measures to be announced won’t take effect immediately.
The yield on 10-year notes dropped as much as nine basis points to 4.53%. The notes drew a yield of 4.632% in Wednesday’s auction, which produced the highest new-issue coupon since 2007.
The surprise acceleration in consumer price growth battered US government bonds as traders pushed bets for the next Federal Reserve interest-rate cut to December from September. The data intensified fears that inflation has been reignited, and could accelerate further if the tariffs US President Trump has threatened take effect.
But while the CPI and core CPI rates unexpectedly quickened, the PCE price index rate that Fed policymakers seek to have average 2% over time may show deceleration to 2.5% for January when released Feb. 28, Citigroup Inc. economists said. They predict the Fed will cut rates in May, though most other Wall Street banks are less sanguine about easing this year, and several predict the central bank will hold rates steady through year-end.