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Bond Report: 2-year Treasury rate hits lowest level since March even after a surge in U.S. wholesale prices

Treasury yields fell for a second session on Wednesday even after data showed U.S. wholesale prices surged in March, suggesting high inflation is likely to persist for the next few months.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.697%

was 2.686%, compared with 2.724% at 3 p.m. Eastern on Tuesday.

The 2-year Treasury note yield
TMUBMUSD02Y,
2.352%

stood at 2.324% versus 2.387% on Tuesday afternoon.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.800%

was 2.801%, down from 2.826% late Tuesday, which was its highest since May 21, 2019.

What’s driving the markets?

Treasury yields fell for a second day Wednesday despite U.S. data showing that the cost of wholesale goods and services jumped 1.4% in March largely due to more expensive food and gasoline. Economists surveyed by The Wall Street Journal had expected the index to show a 1.1% monthly rise.

Meanwhile, the increase in wholesale prices over the past year jumped to 11.2%, the government said Wednesday, from 10% in the prior month. That’s the highest level since the early 1980s.

Read: Has U.S. inflation peaked? Don’t bet on it

Investors remain focused on the separate U.S. consumer price inflation indicator released on Tuesday which suggests that inflation might be peaking. The core reading of the March consumer-price index — which strips out volatile food and energy prices — slowed, rising just 0.3% for the month versus expectations for a 0.5% rise. Meanwhile, the annual headline March CPI showed an 8.5% year-over-year rise, its hottest reading since 1981.

Traders had previously priced in very aggressive interest rate increases by the Federal Reserve, as well as a balance sheet reduction, and lowered some of their expectations for inflation based on Tuesday’s monthly core CPI reading.

See: Peak inflation? What’s next for U.S. as markets debate hottest CPI in more than 40 years.

What do analysts say?

On Tuesday, “Treasuries abruptly reverse course as March inflation print falls short of consensus expectations,” said Societe Generale’s Subadra Rajappa, head of U.S. rates strategy. “While it is hard to read too much into one print, (Tuesday’s) number bolsters the narrative that inflation is possibly peaking as we head into mid-year when base effects are likely to support lower prints. Curve continues to steepen as the market prepares long-end supply and balance-sheet runoff at the May meeting.”

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