US yields fall as price rise modestly in June
By Karen Brettell
July 26 (Reuters) -U.S. Treasury yields fell on Friday after data showed that U.S. prices rose modestly in June, offsetting concerns about a higher-than-expected uptick in inflation following hotter-than-expected price increases for the second quarter on Thursday.
The personal consumption expenditures (PCE) price index nudged up 0.1% last month after being unchanged in May. The core PCE price index rose 0.2% last month, following an unrevised 0.1% gain in May.
Economists polled by Reuters had forecast both monthly headline PCE and core inflation rising 0.1% in June. Some economists increased their estimate, however, after data on Thursday showed core prices rising by 2.9% in the second quarter, above economists’ expectations for a 2.7% gain.
“The upside surprise angst that was instilled based on the quarterly data yesterday was to some extent overpriced, so that's why I think that we had the relief rally,” said Vail Hartman, interest rate strategist at BMO Capital Markets in New York.
Thursday's data also showed the U.S. economy growing at a 2.8% annualized rate in the second quarter, double the first quarter's 1.4% pace.
Interest rate sensitive two-year note yields US2YT=RR were last down 5.8 basis points at 4.386%. They reached 4.34% on Thursday, the lowest since Feb. 2, before rebounding on the growth and inflation data for the second quarter.
Benchmark 10-year note yields US10YT=RR fell 5.2 basis points to 4.204%.
The closely watched yield curve between two-year and 10-year notes US2US10=TWEB was at minus 19 basis points, after reaching minus 11 basis points on Thursday, the smallest inversion since October.
The Federal Reserve is expected to begin cutting interest rates in September as inflation eases back closer to its 2% annual target and the jobs market cools.
Hartman noted that Friday’s data brings the three-month annualized rate for core PCE down to a year-to-date low of 2.3%, “so the more recent trend is building upon the market's confidence that we are on a trajectory that would get us to 2% over the long run.”
Traders are also pricing in a second and possible third cut by year end. FEDWATCH
Reporting By Karen Brettell; Editing by Sharon Singleton
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