Yields for U.S. government debt edged lower Friday, as investors pored over another reading of inflation, affirming that price pressures are gathering, though market participants view them as transitory.

Bond markets closed an hour early on Friday at 2 p.m. Eastern Time, in observance of the Memorial Day holiday.

How Treasurys are performing
  • The 10-year Treasury note yield
    TMUBMUSD10Y,
    1.584%

    was yielding 1.592%, compared with 1.609% at 3 p.m. Thursday.

  • The 30-year Treasury bond
    TMUBMUSD30Y,
    2.263%

    was yielding 2.271%, versus 2.289% on Thursday.

  • The 2-year Treasury note rate
    TMUBMUSD02Y,
    0.140%

    was at 0.143%, virtually down 0.2 basis point from yesterday.

For the week, the 10-year declined 3.7 basis points and fell 4 basis points in May, marking the second straight monthly decline for the benchmark bond. The 30-year bond put in a weekly slide of 6.1 basis points, marking its steepest weekly slide since April 16. The long bond declined 3.1 basis points for the month, also markings its second straight monthly decline.

The 2-year Treasury note posted a weekly decline of 1.2 basis points and a monthly retreat of 1.9 basis points, representing its sharpest monthly skid since December.

Fixed-income market drivers

The Federal Reserve’s key measure of inflation, the personal consumer expenditure index or PCE, leapt to a rate not seen in almost 13 years, reflecting an economy that is running hotter as the reopening from COVID lockdowns and massive federal fiscal stimulus stokes growth.

The consumption expenditure inflation measure climbed 3.6 percent in April from the prior year—the strongest reading since 2008. The core price index, which strip out volatile food and fuel prices, rose 3.1 percent in the year through April—the fastest pace since 1992.

Fixed-income markets appeared little moved on the data, however. Economists’ surveyed by Dow Jones and MarketWatch had forecast that the core price index for rose 2.9% over the prior 12 months.

Bond markets continue to be tightly wound around the themes of inflation expectations and the Fed’s reaction to price pressures, and an anticipated increase in debt issuance as the Biden administration pushes an ambitious $6 trillion budget proposal for the 2022 fiscal year. Biden’s plan projects a deficit of $1.8 trillion for the next fiscal year as the White House pushes for big spending on things like infrastructure and education. That said, the deficit represents a sharp drop from the $3.1 trillion recorded last year under former President Donald Trump, MarketWatch reported.

Analysts continue to key in on inflation for any evidence that it may be longer lasting than some members of the Fed have suggested that it will be.

Trading in Treasurys already indicates expectations for higher inflation but the persistence of higher inflation remains an unanswered question. Some analysts are forecasting that the 10-year Treasury note hits 2% before the end of 2021.

A few strategists have said that Friday’s moves in bonds may be relatively subdued given weaker holiday volumes and investors reluctant to make any substantial bets ahead of next week’s May jobs report, which could prove an important catalyst for markets after April’s weak results which only showed a 266,000 increase.

In other data, the Chicago Business Barometer, also known as the Chicago PMI, jumped to 75.2 in May from 72.1, which was the highest since December 1983.

And a final reading of the consumer-sentiment index issued Friday edged up to 82.9 from an initial 82.8, the University of Michigan said Friday, down from a 13-month high of 88.3 in April.

What debt strategists are saying

“Core PCE is modestly ahead of expectations. The largest monthly core increase in 20 years was accompanied this week by mostly solid economic releases (durable goods ex trans, personal consumption, Chicago PMI, consumer confidence),” wrote Craig Pernick, senior managing director at Chevy Chase Trust.

“The Fed has made clear it expects these strong near-term inflation numbers. We don’t believe this number is significant enough to prompt any change to current policy, but we need to watch like a hawk for those first indications their view is shifting,” he wrote.  

However, the official that that “we are a bit concerned about the potential for more than ‘transitory’ inflation.”



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