Treasury Yields Little Changed as Softer Producer Prices Reinforce Fed Pause Bets

U.S. Treasury yields remained in a tight range on Thursday after a key government report showed producer price inflation was softer than anticipated in July, reinforcing investor expectations that the Federal Reserve will hold interest rates steady at its next meeting.

Producer Prices Cool in July

The U.S. Department of Labor reported that the Producer Price Index (PPI) for final demand was flat for the month, registering 0.0% growth compared to forecasts of a 0.2% increase. Excluding volatile food and energy components, the core PPI rose 0.2%, also coming in just below the consensus estimate of 0.3%.

The annual figures presented a more mixed picture, which helps explain the muted market reaction. While the headline year-over-year wholesale inflation rate slowed to 4.7% from an expected 4.9%, the annual core PPI came in at 4.2%, slightly above the 4.1% forecast. This suggests some underlying price pressures remain sticky.

Muted Market Reaction

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Following the data release, bond yields saw only minor adjustments. The yield on the policy-sensitive 2-year Treasury note edged up by less than a basis point to 4.182%. The benchmark 10-year Treasury yield ticked down fractionally to 4.657%, while the 30-year bond yield rose about 1.4 basis points to 5.236%, reflecting a slight steepening of the long end of the yield curve.

Fed Outlook and Headwinds

This latest inflation reading, combined with a recent in-line Consumer Price Index report and a softer non-farm payrolls number, solidifies the argument for the Fed to pause its rate-hiking campaign in September. According to the source, money markets are now pricing in approximately a 40% probability of a September rate hike, a significant drop from nearly 67% a week prior.

Despite the encouraging wholesale price data, a broader bond rally was constrained by elevated oil prices amid ongoing risks to shipping in the Strait of Hormuz. Bond investors remain cautious, and market focus now shifts to Friday's U.S. retail sales report for insights into the resilience of consumer demand.