Treasury yields edge lower despite higher than expected US inflation

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U.S. Treasury yields and the dollar edged lower on Wednesday as investors shrugged off data showing higher-than-expected U.S. inflation last month.

After the news was released, the yield on the rate-sensitive two-year U.S. Treasury note fell to 5.01% from 5.04% before the consumer price data was released. When prices rise, bond yields fall.

The dollar gave up earlier gains on the day and was flat against a basket of six peers.

U.S. consumer prices rose at an annual rate of 3.7% in August, up from 3.2% in the previous month and slightly higher than analysts’ forecasts.

Despite rising interest rates, the vast majority of market participants are betting on the Federal Reserve to keep rates steady at next week’s policy meeting. Core inflation fell to 4.3% from 4.7% over the same period.

“The rise in U.S. inflation in August is unlikely to prompt the Fed to raise interest rates further this month,” said Richard Garland, chief investment strategist at Omnis Investments. “The main impact on headline inflation comes from higher energy prices, but given that core inflation remains subdued and inflation Expectations have been falling and the Fed may consider that.”

Reaction to the data was muted as Wall Street’s benchmark S&P 500 and the tech-heavy Nasdaq Composite rose 0.2% at the open in New York.

Oil prices have been rising since June after oil exporters Saudi Arabia and Russia announced a series of production cuts to support prices, and the overall figure is expected to increase.

Brent crude, the international benchmark, rose 0.2% to $92.21 a barrel on Wednesday, hitting a 10-month high. U.S. West Texas Intermediate crude rose 0.1% to $88.94.

However, recent pressure on prices has prompted traders to shift their bets to another interest rate hike by the European Central Bank, which is due to announce its policy decision on Thursday. The swaps market currently sees a 66% chance that the central bank will raise interest rates by 0.25 percentage points to 4% this week.

Jason Davis, global rates portfolio manager at J.P. Morgan Asset Management, said that if “the ECB does decide to raise rates tomorrow, they are more likely to signal a willingness to pause after that, leaving the impact on final rates rather limited.” .

In Europe, the Stoxx 600 index fell 0.4%, continuing the previous day’s losses, France’s Cac 40 index fell 0.3%, and Germany’s Dax index fell 0.4%.

The policy-sensitive two-year German Bund yield rose 0.05 percentage point to 3.16%, while the European regional benchmark 10-year Bund yield rose 0.03 percentage point to 2.68%.

Asian markets edged lower on Wednesday, with China’s benchmark CSI 300 index down 0.6%, Hong Kong’s Hang Seng Index and Japan’s Topix index down 0.1%.