10-Year Treasury Yield Drops as Hope for Fed's Favored Inflation Gauge Rises

The 10-year Treasury yield dropped by the most in a month on Thursday, as investors clung to hopes that the Federal Reserve's preferred inflation gauge, the personal consumption expenditures (PCE) price index, may cool more than expected. The yield on the 10-year Treasury note BX:TMUBMUSD10Y fell 10.8 basis points to 4.524%, after factoring in new-issue levels, marking the largest one-day drop since Jan. 15, according to Dow Jones Market Data.

The decline in yields came after data released on Thursday showed that wholesale prices rose sharply in January, but some components of the producer-price index (PPI) that feed into the PCE were weaker than expected. The PPI for final demand increased 0.4% last month, topping the estimate of economists for a 0.3% rise. However, components such as health care, airlines, financial services, and insurance came in weaker than expected, offering some hope that the Fed's preferred inflation measure may start to cool.



The 10-year Treasury yield had been on a five-day streak of advances that took the benchmark rate to its highest level since Jan. 23 on Wednesday, following a hotter-than-expected U.S. consumer-price index for January. The annual headline CPI inflation rate edged up to 3%, causing traders to mostly price in just one 25-basis-point rate cut by the U.S. central bank this year.

The decline in yields on Thursday also came as the U.S. dollar weakened, with the dollar index DXY, -0.47% falling 0.47% to 102.75. A weaker dollar can make U.S. assets, including Treasury bonds, more attractive to foreign investors.



Investors are now looking ahead to the Treasury's $25 billion auction of 30-year bonds, with results set to be announced just after 1 p.m. Eastern time. The auction will provide further insight into demand for longer-dated U.S. government debt and could influence the direction of yields in the near term.

In conclusion, the decline in the 10-year Treasury yield on Thursday reflects investors' hopes that the Fed's preferred inflation gauge, the PCE, may cool more than expected. The weaker-than-expected components of the PPI, combined with a weaker U.S. dollar, contributed to the drop in yields. As investors await the Treasury's 30-year bond auction, they will continue to monitor inflation data and central bank communications for further clues about the direction of interest rates and bond yields.