Bond Yields Reverse Gears After PCE Inflation Eases in June

On Friday, Treasury yields experienced a reversal, declining across the board during morning trading. The shift came in response to data indicating that the Federal Reserve's preferred inflation gauge had eased on an annual basis, reaching its slowest pace in almost two years.

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Here are the yield movements observed:

• The yield on the 2-year Treasury declined to 4.904%, down 3.5 basis points from Thursday's 4.939%.
• The yield on the 10-year Treasury fell to 3.992%, down 1.9 basis points from Thursday's 4.011%.
• The yield on the 30-year Treasury slightly decreased to 4.051%, down less than 1 basis point from late Thursday's 4.058%.

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The release of data on Friday showed that the PCE price index, the Federal Reserve's favored inflation measure, rose by a modest 0.2% in June, aligning with economists' expectations. The year-over-year increase in prices slowed to 3% from 3.8%, marking the lowest level since October 2021. The core inflation rate, which excludes food and energy prices, also decelerated to 4.1% from 4.6% over the past year, still significantly above the Fed's 2% target.

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In contrast, Thursday witnessed a substantial increase in yields due to robust U.S. economic data, reports on the Bank of Japan modifying its yield-control program, and a poorly received auction of 7-year notes. The 10-year rate experienced a significant jump of 16.1 basis points on that day, the most considerable increase since September 26, 2022.

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Richard Saperstein, Chief Investment Officer of Treasury Partners in New York, a firm managing $9 billion in assets, noted that Friday's PCE data suggests that inflation is still decelerating but remains above the Fed's 2% target. This implies that the Fed may continue raising interest rates as they still have work to do in managing inflation. However, he also warned that the potential for additional tightening, after more than a year of steep rate hikes, poses a risk of slowing down the economy.

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