US Treasuries Steady as Inflation Reading Offers Few Surprises

ao{dukqw37i[f4vggkrb]rqd_media_dl_1.png Bloomberg

Article content

(Bloomberg) — US Treasuries held steady after fresh readings on inflation and jobless claims were broadly in-line with expectations, offering little evidence for the Federal Reserve’s next move.

Article content

Yields were one to two basis points lower across tenors Thursday morning in New York, with the benchmark 10 year trading at 4.35%.  

Article content

Article content

The core personal consumption expenditures price index, which excludes food and energy items, rose 0.3% in June from the month prior, matching economist estimates. The gauge is considered the Fed’s preferred measure of evaluating underlying inflation. A separate report on weekly initial applications for unemployment insurance was little changed.   

Article content

Article content

“It’s all so close to expectations, I’m not sure this is really going to change the narrative a whole lot,” said Jonathan Pingle, chief US economist at UBS, on Bloomberg TV.

Article content

Article content

Earlier in the session, Treasuries clawed back some of the losses suffered Wednesday after the central bank held rates steady and Fed Chair Jerome Powell indicated that he may keep investors waiting for the first reduction in borrowing costs this year. Money markets slashed wagers on rate cuts this year and now only see a 36% chance of a reduction in September. 

Article content

Powell, speaking after the decision, urged patience in the face of a still-strong labor market and above-target inflation. 

Article content

“We expected the FOMC meeting outcome to be hawkish, and Chair Powell did not disappoint,” Anshul Pradhan, head of US rates strategy at Barclays, wrote in a note with colleagues. The bank has argued “for some time” that the market should put more weight on a later start for cuts and expects a move only in December.  

Article content

The US two-year yield — which is most sensitive to changes in monetary policy — has climbed more than 20 basis points through July. It was little changed on Thursday.  

Article content

Article content

While US President Donald Trump has repeatedly urged the Fed to lower borrowing costs, Powell has resisted pressure to do so given the labor market is in good shape and inflation remains above target. Long-term US inflation expectations, measured by swaps, have drifted about 20 basis points higher since April to 2.50%. 

Article content

The impact of higher US tariffs, with many trade deals only being struck this week, remains highly uncertain. Economic data implies companies are beginning to more meaningfully pass on some tariff-related costs to consumers, while Powell said Wednesday that the Fed was “a bit looking through goods inflation by not raising rates.”

Article content

Justin Onuekwusi, chief investment officer at St. James’s Place in London, last week added exposure to Treasury Inflation-Protected Securities, or TIPS, to buffer his portfolios against an unexpected spike in prices. 

Article content

“We feel tariffs are short-term inflationary, long-term deflationary, but understanding the shape of inflation is very difficult in this environment,” he said in an interview. 

Article content

—With assistance from Sujata Rao.

Article content