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U.S. Treasury yields edge up from 3 month lows ahead of May inflation data

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U.S. government bond yields on Thursday were edging higher, rising from their lowest level in about 3 months, ahead of a closely watched reading of May inflation at 8: 30 a.m. Eastern Time that could serve as an inflection point for Treasurys.

Fixed-income investors are also watching a policy update from the European Central Bank, followed by a news conference at the same time the inflation and a weekly employment report are released, which will also be parsed by investors.

How Treasurys are trading
  • The 10-year Treasury note yield
    TMUBMUSD10Y,
    1.504%

    was at 1.502%, from 1.489% on Wednesday, based on 3 p.m. Eastern Time levels, which marked the lowest yield for the benchmark bond since March 11, according to Dow Jones Market Data. Yields fall as prices rise, and vice versa.

  • The 30-year Treasury bond
    TMUBMUSD30Y,
    2.184%

    was yielding 2.180%, compared with 2.168% a day ago, which was the long bond’s lowest yield since Feb. 19.

  • The 2-year Treasury note rate
    TMUBMUSD02Y,
    0.160%

    was at 0.157%, versus 0.155% on Wednesday.

What’s driving the fixed-income market?

Fixed-income investors, lately, have traded as if concerns about runaway inflation are on the back burner and that they are warming to the view that growing pricing pressures will be temporary as the economy continues to recover from the worst pandemic in a century.

Even with Wednesday’s breakout lower for long-dated yields, investors will be closely watching to see if the May consumer-price index reading creates any friction in bond markets. Economists expect CPI to show a 0.5% monthly rise for May. That would put the year-over-year rate at 4.8% or a bit higher, the fastest pace since 2008 when oil peaked at $150 a barrel.

Read: Inflation is still surging, CPI will likely show. Any relief for consumers in sight?

A hotter-than-expected jump in the April CPI briefly rattled markets last month, and has raised the possibility that the Federal Reserve could move sooner than anticipated to slow its $120 million a month asset purchases, which had helped to ease tensions in the market during the worst of the pandemic last March.

The ECB’s policy update, meanwhile due at 1:45 p.m. Frankfurt time, or 7:45 a.m. ET, will be followed by ECB President Christine Lagarde’s news conference at 8:30 a.m., and could be more closely pored over because it comes ahead of the Fed’s two-day meeting that kicks off June 15.

What strategists are saying

“Investors appear to be backing away from the reflation trade precisely at the moment of greatest risk that the realized data catches up with expectations,” said Ian Lyngen and Ben Jeffery, head of U.S. rates strategy at BMO Capital Markets, in a note.

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