Yields tumble as inflation data misses expectations

NEW YORK: Benchmark US Treasury yields tumbled on Wednesday after data showed that inflation stayed benign in January, disappointing investors betting that price pressures would increase more.

The Labor Department said on Wednesday its consumer price index increased 0.3% last month after climbing a revised 0.2% in December. In the 12 months through January the CPI rose 1.4% after gaining a revised 1.3% December. Economists polled by Reuters had forecast the CPI rising 0.3% and increasing 1.5% year-on-year.

Core CPI was also unchanged in the month, compared to economist's expectations of a 0.2% increase.

"It's disappointing in respect to the view of inflation that has been developing for the last few months," said Tom Simons, a money market economist at Jefferies in New York.

"I think we're maybe pricing in a reversion back to the low inflation environment, at least until the economy reopens more broadly and things return to some semblance of normal," Simons said.

Investors have been betting that inflation will jump as President Joe Biden and his Democratic allies ready a $1.9 trillion COVID-19 relief package.

Unprecedented Federal Reserve policy that is flooding markets with cash is also seen as boosting prices.

Benchmark 10-year yields slid to 1.148%, after earlier rising to 1.176%. They are holding below a 11-month high of 1.200% reached on Monday.

Breakeven Inflation rates also fell to 2.19%, after earlier rising to 2.21%, the highest since 2014. That means that investors are pricing in average annual inflation of 2.19% for the next 10 years..

Long-dated yields may rise back later on Wednesday as traders prepare for the Treasury Department to sell $41 billion in 10-year notes, the second sale of $126 billion in new coupon-bearing supply this week.

Yields typically rise ahead of auctions as dealers make room on their balance sheets for the new debt. Higher yields are also more likely to draw buyers to the sales.

The Treasury sold $58 billion in three-year notes on Tuesday to strong demand. It will also sell $27 billion in 30-year bonds on Thursday.

Fed Chairman Jerome Powell will also speak later on Wednesday about the labor market.