The 10-year Yield Drops to Its Lowest Level in Three Weeks as the Fed's Preferred Inflation Measure Rises

U.S. government bond prices climbed Thursday morning, extending a rally following the release of January’s producer-price index (PPI), which provided some optimism that inflation pressures could ease for the Federal Reserve’s preferred gauge.

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Bond Market Movements

• The 2-year Treasury yield fell 4.7 basis points to 4.318%, down from 4.365% on Wednesday.
• The 10-year Treasury yield dropped 8.2 basis points to 4.554%, compared to 4.636% the previous day.
• The 30-year Treasury yield declined 6.4 basis points to 4.771%, after closing at 4.835% on Wednesday.

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Bond yields move inversely to prices, meaning as demand for Treasurys increased, yields declined. Notably, Wednesday’s closing levels had been the highest since mid-to-late January for 2-, 10-, and 30-year maturities.

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What’s Driving the Market

Thursday’s economic data showed wholesale prices rising more than anticipated in January, signaling persistent inflationary pressures. The producer-price index increased 0.4% last month, surpassing the 0.3% forecasted by economists. On an annual basis, the PPI rose to 3.5%, up from 3.3% in December.

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However, a deeper look at the report revealed some encouraging signs that could help temper inflation as measured by the personal-consumption expenditures price index (PCE)—the Fed’s preferred metric.

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"Even though the headline PPI number was higher than expected, certain key components that feed into PCE inflation came in softer," said Lawrence Gillum, chief fixed-income strategist at LPL Financial. "Sectors like healthcare, airlines, financial services, and insurance showed weaker-than-expected price increases."

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He also noted that market positioning may have played a role in Thursday’s rally, as traders covering short positions added to demand for Treasurys.

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Market Reaction and Rate Expectations

The decline in Treasury yields interrupted a five-day upward streak for the 10-year yield, which had reached its highest level since January 23 on Wednesday. That rally followed a stronger-than-expected consumer-price index (CPI) report, which showed headline inflation edging up to 3% year-over-year in January. As a result, traders have largely adjusted their expectations for the Federal Reserve, now pricing in just one 25-basis-point interest rate cut for 2024.

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Separately, labor market data released Thursday showed initial jobless claims fell to 213,000 for the week ending February 8, slightly below economists' median estimate of 215,000, suggesting continued strength in employment.

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Investors are also watching the Treasury Department’s $25 billion auction of 30-year bonds, with results expected shortly after 1 p.m. Eastern time.

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