Treasury yields extended their decline on Thursday as the latest U.S. data revealed a sluggish pace of wholesale inflation in June.

Treasury two-year yield rebounds after biggest slide in decades
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2-year Treasury Yield

The 2-year and 3-year rates led the fall, with the 2-year Treasury yield dropping 12.9 basis points to 4.611%, the lowest level since June 12. Over the last two trading days, the work fell by 28.3 basis points, marking its most significant two-day decline since March. Similarly, the 10-year Treasury yield retreated ten basis points to 3.759%, reaching its lowest since June 28. The 10-year yield has decreased by 28.8 basis points in the past four trading sessions. The 30-year Treasury yield fell 5.5 basis points to 3.895% from Wednesday’s 3.950%, showing a decline of 14.7 basis points over the past three trading days.

Fresh data indicating a slowdown in U.S. inflation drove the decline in Treasury yields. The producer price index rose by a modest 0.1% in June, continuing a trend of weak readings. Additionally, initial jobless benefit claims fell to 237,000, suggesting that companies are hesitant to lay off employees. These factors have increased investor optimism, as they may prompt the Federal Reserve to pause its monetary policy tightening. Market analysts believe the disinflation narrative is taking hold, considering the lower-than-expected producer and consumer price index figures, according to Market Watch.

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Market expectations suggest a 92.4% probability of a 25 basis point interest rate hike by the Fed on July 26, bringing the range to 5.25%-5.5%. However, the likelihood of an additional 25 basis point hike in September is currently at 11.1%, down from approximately 27.5% a week ago. Analysts anticipate the Fed will lower the Fed funds rate target to around 5% or lower next year.

In conclusion, U.S. Treasury yields continued their downward trajectory as wholesale inflation showed signs of slowing. The market is increasingly optimistic about a potential pause in the Federal Reserve’s monetary policy tightening, supported by weak inflation data and indications of stability in the job market.

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