Teasury yields tumble after June CPI slows much more than expected

U.S. Treasury yields fell on Tuesday following the release of a cooler-than-expected inflation report.

The key 10-year Treasury yield — the main benchmark for U.S. government borrowing — fell more than 2 basis points to 4.583%.

The yield on the 2-year Treasury note, which are more sensitive to short-term Federal Reserve rate policy, declined more than 5 basis points to 4.204%. The 30-year bond yield, meanwhile, shed less than 1 basis point to 5.091%.

One basis point equals 0.01%, or 1/100th of 1%, and yields and prices move inversely to one another.

The consumer price index fell 0.4% in June, a bigger decline than investors anticipated, bringing its annual increase to 3.5%. Economists polled by Dow Jones anticipated a 3.8% year-on-year increase for CPI.

The declines also came after Fed Chairman Kevin Warsh’s testimony before Congress was released. In it, he promises to make inflation a “thing of the past.”

“The Fed’s number one objective is to get monetary policy right — or as near to it as we possibly can. That is our clear and constant aim, the star we steer by,” he added. “And if we get policy right — and we will — the inflation surge of the last five years will be a thing of the past.”

Yields have been moving higher of late as oil prices rise due to the ongoing U.S.-Iran war — stoking fears of persistent inflation. However, those fears haven’t translated yet into higher consumer prices.

Expectations for an interest rate increase by the Fed at its July meeting declined sharply after the inflation report, with investors placing just a 17% chance of a 25 basis point hike after giving it 42% odds on Monday, according to CME’s FedWatch tool.

“You can take those Fed rate hikes off the table for now as the current neutral Fed funds rate of 3.75% is perfectly balanced for the upside and downside risks to the economy and inflation. Bet on it. The markets are,” wrote Chris Rupkey, chief economist at FWDBonds.

Traders though are still expecting a hike at the Fed’s September meeting, with about a 60% chance that the target rate will be a quarter or half point higher at that meeting.