Longer-dated U.S. Treasury yields dipped on Friday after the latest round of economic data and were set for a weekly decline as markets have largely priced out any chance of a rate hike from the Federal Reserve at its policy meeting later this month. The Labor Department said import prices increased 0.3% last month, above the estimate of economists polled by Reuters that called for a 0.7% decrease, after a downwardly revised 1.7% advance in May.
The data showed declines in the costs of food and energy products were more than offset by higher prices for capital and consumer goods.
Expectations for a rate hike of at least 25 basis points from the Fed tumbled earlier this week after readings on consumer and producer prices were cooler than expected. Money markets are now pricing in only a 14.4% chance for a hike in July, according to CME FedWatch, down from slightly more than 40% on Monday. However, expectations for a hike at the central bank's September meeting stand at 57.1%.
But recent comments from multiple Fed officials, including Chairman Kevin Warsh, have flagged concerns about inflation pressures while noting the labor market remains stable.
"The market is still not sure what to do with all this information - you have the Fed sounding extremely hawkish, the data coming in not as hawkish, but it's also one reading," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.
Geopolitical worries are also re-escalating ahead of the weekend, he added.
"So it's unclear as to whether a lot of this transitory noise in inflation will remain transitory, or whether the Fed should be starting to look at it more closely as a potential source of inflationary pressure."
BENCHMARK YIELD SET FOR WEEKLY DECLINE
The yield on the benchmark U.S. 10-year Treasury note fell 2.8 basis points to 4.541%. The yield was down nearly three basis points on the week and set for its first weekly drop after climbing for two straight weeks. Yields had been retreating since mid-May as tensions between the U.S. and Iran appeared to be waning, pushing oil prices lower. However, hostilities have intensified in recent weeks, including attacks on infrastructure, causing a reversal in crude prices to one-month highs. U.S. crude jumped 4.74% to $82.69 a barrel and Brent climbed to $88.14 per barrel, up 4.64% on the day.
The yield on the 30-year bond shed 3.3 basis points to 5.064% and was slightly lower on the week, which would mark its first weekly decline in three. A risk-off move that was weighing on stocks may have been providing a bid to bonds, said Mona Mahajan, head of investment strategy and asset allocation at Edward Jones. "We're seeing a similar move in the bond market with, despite the higher oil prices, bond yields are moving lower today, so maybe bonds acting as a bit of that flight to safety trade." Late Thursday, Federal Reserve Vice Chair Philip Jefferson suggested he would be open to raising interest rates if there is no near-term improvement in inflation, though for now he believes it will be enough to hold short-term borrowing costs steady. His comments came after Dallas Federal Reserve President Lorie Logan called for "modestly higher" interest rates earlier in the day.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 36.9 basis points.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 2.2 basis points to 4.134% and was down four basis points on the week. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.271% after closing at 2.248% on Thursday. The 10-year TIPS breakeven rate was last at 2.245%, indicating the market sees inflation averaging about 2.2% a year for the next decade.
