U.S. yields fall after inflation shows signs of cooling

NEW YORK: U.S. government bond yields fell on Tuesday after data showed consumer prices increased at their slowest pace in six months in August, suggesting that inflation had probably peaked.

The yield on the benchmark 10-year note dropped more than 6 basis points on the day to a low of 1.263pc, the lowest reading since Aug. 24.

The core measure of U.S. consumer prices edged up 0.1pc last Month, the smallest gain since February.

The measure, which excludes the volatile food and energy components, increased 4.0pc on a year-on-year basis after advancing 4.3pc in July.

The data could be volatile in the coming months as shortages of basic materials and parts have created bottlenecks, and price increases, across various supply chains.

The August slowdown gives the Federal Reserve breathing room as it prepares to reduce its massive bond holdings and decide how soon to begin lifting rates from near zero.

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"The big question for the Fed is going to be whether this further moderation pushes inflation lower in the next few months, and whether inflation significantly cools. And that could be interesting for the rate hike component of all of this, which they have been very careful to divorce from tapering," said Gennadiy Goldberg, interest rate strategist at TD Securities in New York.

The yield on 10-year Treasury notes was down 4.4 basis points to 1.280pc. The 30-year Treasury bond yield was down 5.2 basis points to 1.853pc.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 0.8 basis points at 0.207pc.

The U.S. Treasury yield curve measuring the gap between yields on 5- and 30-year Treasury notes was at 107.7 basis points, the flattest since August 2020.

The flatter 5/30 spread points to traders losing interest in the reflation story, in line with cooling inflation.

The spread between 2- and 10-year Treasury yields, was at 107.2 basis points.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.506pc, after closing at 2.554pc on Monday.

A pullback in U.S. stock indexes further pressured yields lower mid-morning according to Tom di Galoma, managing director at Seaport Global Holdings.

"Equities seem to be struggling a bit and there's a flight to quality behind it taking place," he said.