US Treasury prices fell on Thursday after a Federal Reserve official said the US central bank should raise interest rates if data confirms a stronger jobs market and inflation outlook in the second quarter, noting that markets are too pessimistic on the economy. The comments by Boston Fed President Eric Rosengren, a voting member this year on the Fed's rate-setting committee, point to growing pressure within the US central bank to raise rates in the coming months.
They also highlight a persistent divergence between economic expectations of Fed officials and investors, who are pricing for a low chance of an interest rate hike until mid-2017. "Rosengren had fairly lofty expectations on where consumers are going to be this year," said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York. However, the Fed has been "consistently on the wrong side of economic data. The market's going to discount what they say, not because they don't believe their willingness to hike but because it's their ability that's in doubt," Kohli said. Data on Thursday showed that the number of Americans filing for unemployment benefits in the latest week rose to a more than one-year high while US import prices rose in April, but missed economists' expectations.
"We should be getting signs of better inflation data, but it hasn't happened yet. I think this will set some lower expectations for PPI and CPI," said Thomas Simons, a money market economist at Jefferies in New York. Producer Price Index data for April will be released on Friday, along with the more highly anticipated retail sales report for April. Consumer Price Index data for April is due on Tuesday.
Treasury yields have fallen for the past two-and-a-half weeks on concerns about slowing global growth and tepid inflation. Benchmark 10-year notes ended down 9/32 in price to yield 1.76 percent, up from 1.73 percent late on Wednesday. The yields have fallen from 1.94 percent on April 26. Higher yields on the day helped the Treasury sell $15 billion in 30-year bonds to solid demand, the final sale of $62 billion in new coupon-bearing supply this week. The bonds sold at a high yield of 2.615 percent, around a basis point higher than where the bonds had traded before the auction.
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