2-year Treasury yield has biggest two-day drop since March after U.S. producer price data

What happened

• The yield on the 2-year Treasury
  TMUBMUSD02Y,
  4.624%
  declined 12.9 basis points to 4.611% from 4.740% on Wednesday. That’s the lowest level since June 12, based on 3 p.m. Eastern time figures from Dow Jones Market Data. The yield is down 28.3 basis points over the last two trading days — its largest two-day decline since the period that ended on March 23.

• The yield on the 10-year Treasury
  TMUBMUSD10Y,
  3.768%
  retreated 10 basis points to 3.759% after factoring in re-opening levels. Thursday’s level is the lowest since June 28. The 10-year yield is down 28.8 basis points over the last four trading sessions.

• The yield on the 30-year Treasury
  TMUBMUSD30Y,
  3.905%
  fell 5.5 basis points to 3.895% from 3.950% late Wednesday. The 30-year yield is down 14.7 basis points over the last three trading days.

What drove markets

Investors pushed Treasury yields lower on Thursday as fresh data provided further evidence of slowing U.S. inflation. The producer price index rose 0.1% in June, extending a string of weak readings, and advanced by an equivalent level for the 12-month period that ended last month.

Meanwhile, initial jobless benefit claims fell to 237,000 last week, suggesting that many companies are reluctant to fire employees.

Investors are hopeful that recent signs of cooling inflation will allow the Federal Reserve to end monetary-policy tightening soon. Data released on Wednesday showed that the headline annual rate from the consumer price index was 3% in June, the lowest level since early 2021 and well below the 9.1% peak of a year ago.

In an interview with CNBC on Thursday, San Francisco Fed President Mary Daly said policy makers “have to remain resolute” about bringing interest rates to a restrictive level and holding them there until inflation is clearly back to their 2% target. She also said that she was mindful of the fact that “we still have an economy that has a lot of momentum,” despite about 500 basis points of tightening since March 2022.

Markets are pricing in a 92.4% probability that the Fed will raise interest rates by 25 basis points to a range of 5.25%-5.5% on July 26, according to the CME FedWatch tool. However, the chances of another 25 basis point hike in September are just 11.1%, down from about 27.5% a week ago.

The central bank is expected to take its fed funds rate target back down to around 5% or lower next year.

What analysts are saying

“The disinflation narrative is in full effect with less-than-expected PPI numbers today following on the heels of lower-than-expected CPI numbers yesterday,” said  Chris Zaccarelli, chief investment officer for Independent Advisor Alliance in Charlotte, N.C.

“The implication for investors is that buying stocks and bonds is the best course of action, unlike last year when both asset classes dropped in unison,” Zaccarelli wrote in an email. “It’s likely that rates stay at this level for an extended period of time (e.g. the Fed raises rates once or twice more this year and then doesn’t cut them for 6-12 months), so investors may have limited price appreciation on their bonds, but the much higher yield can provide a very strong complement to their equity positions, which should be able to gain in value as long as the economy stays out of recession.”