The yield on 10-year U.S. Treasury bonds edged lower Friday, as traders digested a surprise drop in wholesale prices.
The 10-year Treasury yield was trading around 4.227% at 5:00 a.m. ET, down 1 basis point. Yields slipped on Thursday as traders reacted to the inflation news and other data points from earlier in the week.
Yields on 2-year Treasury notes reversed Thursday’s move lower, trading slightly higher at 4.69%. Yields and prices move in opposite directions and one basis point is equivalent to 0.01%.
It comes after the producer price index, a measure of inflation at the wholesale level, slipped 0.2% in May, lower than economist expectations of a 0.1% uptick and a 0.5% rise in April. On an annual basis, PPI increased by 2.2%.
“Both the headline and core US PPI inflation were significantly lower than expected, strengthening the view that inflationary pressures have finally started to ease,” Rabobank researchers said in a note Friday.
The figures added to other data releases this week, with weekly initial jobless claims hitting a 10-month high, and consumer prices coming in flat for May — 0.1 percentage point below expectations.
Deutsche Bank analysts said on Friday that, taken together, the data had led investors to grow more confident about the prospect of interest rate cuts by the U.S. Federal Reserve.
“Given those data releases, investors dialled up the prospects of rate cuts from the Fed, and the amount priced in by the December meeting was up +6.2bps on the day to 50bps,” the analysts, led by Henry Allen, said in a note. “In turn, that led to a fresh rally for US Treasuries [on Thursday], which got another boost from a strong 30yr auction later in the session that saw the highest bid-to-cover ratio in 12 months.”
The Fed on Wednesday opted to hold rates steady at 5.25%-5.50% and indicated that there would be just one cut this year.
Data due Friday includes the University of Michigan consumer survey for June, and U.S. import and export data for May.
— Jeff Cox contributed to this report.