Yields hold at lower levels as reflation trade loses steam

NEW YORK: Benchmark US Treasury yields held below recent highs on Thursday as investors continued to absorb disappointing inflation data from the previous day, and before the US Treasury Department's sale of new long-dated debt.

Yields dropped on Wednesday after data showed that the core consumer price index, which excludes the volatile food and energy components, was unchanged in January, missing economists' expectations for a 0.2% increase.

Investors have been betting that inflation will rise as the economy returns to normal and as the US government prepares new fiscal stimulus.

"Yesterday's CPI took a little bit of steam out of the reflation trade. It feels like we are trying to attempt to find a little bit of a range here," said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York.

Lederer added that he does expect yields to rise later this year as COVID-19 vaccines are rolled out and the economy returns to more normal conditions.

Data on Thursday showed that the number of Americans filing new applications for unemployment benefits inched down last week.

Benchmark 10-year yields were little changed on the day at 1.150%. They are holding below a 11-month high of 1.200% reached on Monday.

Breakeven inflation rates were last at 2.19%, after rising to 2.22% before the CPI data on Wednesday, the highest since 2014. That means investors are now pricing in average annual inflation of 2.19% for the next 10 years..

Inflation expectations have also risen as the Federal Reserve commits to maintaining its zero interest rate policy and unprecedented bond purchases for the foreseeable future.

The US central bank is unlikely to pull back on its bond-buying stimulus this year, San Francisco Federal Reserve Bank President Mary Daly said in an interview with the Wall Street Journal on Thursday.

Fed Chair Jerome Powell on Wednesday repeated his pledge for continued loose monetary policy.

Thirty-year bond yields were unchanged on the day at 1.924%. They briefly rose above the key 2% level on Monday for the first time in a year.

The US Treasury Department will sell $27 billion in 30-year bonds on Thursday, the final sale of $126 billion in new coupon-bearing supply this week.

The Treasury saw strong demand for $41 billion in 10-year notes on Wednesday and $58 billion in three-year notes on Tuesday.