Treasuries Regain Ground Following Consumer Price Inflation Data

After moving sharply lower over the past several sessions, treasuries regained some ground during trading on Tuesday.

Bond prices pulled back off their best levels in afternoon trading but remained in positive territory. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, fell by 5.5 basis points to 2.725 percent.

The ten-year yield closed lower for the first time in eight sessions after ending Monday’s trading at its best closing level in over three years.

The rebound by treasuries came as traders seem optimistic that inflation has peaked following the release of the Labor Department’s report on consumer prices in the month of March.

While a spike in gasoline prices contributed to a jump in consumer prices, core prices increased by less than economists had expected.

The Labor Department said its consumer price index surged by 1.2 percent in March after climbing by 0.8 percent in February. The sharp increase in consumer prices matched economist estimates.

The jump in consumer prices came as gasoline prices skyrocketed by 18.3 percent, accounting for over half of the monthly increase.

With crude oil prices pulling back off their recent highs, Andrew Hunter, Senior U.S. Economist at Capital Economics, predicted the surge in energy prices will be partly reversed in April and said he expects energy inflation to decline significantly over the rest of this year.

Meanwhile, the report showed core consumer prices, which exclude food and energy prices, edged up by 0.3 percent in March after rising by 0.5 percent in February. Economists had expected another 0.5 percent increase.

The annual rate of consumer price growth accelerated to 8.5 percent in March from 7.9 percent in February, showing the fastest growth since December 1981.

Core consumer prices were up 6.5 percent year-over-year in March, reflecting an uptick from the 6.4 percent jump in February. The annual growth represents the biggest increase since August 1982.

“The surge in energy prices helped drive headline CPI inflation up to a new 40-year high of 8.5% in March but, with base effects set to become much more favorable and signs that monthly gains in core prices are moderating, we expect that to mark the peak,” said Hunter.

Treasuries gave back some ground in afternoon trading after the Treasury Department revealed this month’s auction of auction of $34 billion worth of ten-year notes attracted below average demand.

The ten-year note auction drew a high yield of 2.720 percent and a bid-to-cover ratio of 2.43, while the ten previous ten-year note auctions had an average bid-to-cover ratio of 2.52.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

Trading on Wednesday may be impacted by reaction to the Labor Department’s report on producer price inflation in the month of March. The producer price index is expected to jump by 1.1 percent.

Bond traders are also likely to keep an eye on the results of the Treasury Department’s auction of $20 billion worth of thirty-year bonds.

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