Treasury Yields Drop 6.5 Basis Points as Inflation Data, Auction Boost Demand

U.S. Treasury yields experienced a notable decline on Wednesday, driven by the release of inflation data and the Treasury auction. The market initially reacted to the May Consumer Price Index (CPI) data, which came in lower than expected, leading to a rally in Treasury prices. This rally was further bolstered by strong demand for the month's 10-year Treasury auction, which saw a robust bid-to-cover ratio and a lower-than-expected yield.

The yield curve steepened as a result, with the spread between 2-year and 10-year yields widening by 2 basis points, and the spread between 5-year and 30-year yields expanding by 5.5 basis points. The rally was primarily driven by longer-term bonds, which helped to narrow the 2s10s yield spread from its intraday high.

The Treasury Department auctioned 39 billion in 10-year notes, with a high yield of 4.421%, 0.7 basis points lower than the pre-auction trading level. Primary dealers were allocated 9% of the notes, slightly higher than the previous auction, while indirect bidders took 70.6% and direct bidders 20.5%. Following the auction results, the 10-year yield fell below 4.42% and dropped to 4.405%, a decline of 6.5 basis points.

The market's reaction to the CPI data suggested increased bets on Federal Reserve policy easing, with market-implied odds of a rate cut by year-end rising to 48 basis points from 42 basis points the previous day. The 2-year Treasury yield stood at 3.9431%, the 5-year yield at 4.0102%, the 10-year yield at 4.4144%, and the 30-year yield at 4.909%. The 2s10s yield spread was 46.929 basis points, and the 5s30s yield spread was 89.881 basis points.

Analysts noted that the rally in Treasuries was supported by a pullback in equities from their highs, as well as news that U.S. military personnel and their families were being voluntarily evacuated from the Middle East. Additionally, WTI crude oil prices surged by over 5% intraday before closing up 4.9%. The inflation data had initially boosted short-term Treasuries in the morning session, with market pricing reflecting greater bets on Fed easing.