Treasuries Add to Post-CPI Gains After Strong Auction Demand

Treasuries rallied following a lower-than-expected May CPI reading and strong demand at the $39 billion 10-year note auction, awarded at 4.421%, signaling robust end-user interest. The auction results, coupled with benign inflation data, bolstered expectations for more than one Federal Reserve interest-rate cut this year, with traders now pricing in 47 basis points of easing by year-end and increased bets for a September rate cut. While the 10-year auction saw strong demand, concerns remain regarding demand for the upcoming 30-year bond auction, as 30-year yields are still up 10 basis points year-to-date amid wider US government budget deficit concerns.

Analysis

US Treasuries experienced a significant rally, driven by dual catalysts: benign May US consumer price index data, which indicated underlying inflation rose less than forecast for the fourth consecutive month, and strong demand registered at the $39 billion 10-year note auction. The auction was awarded at 4.421%, slightly below its pre-auction trading yield, with robust bidder participation metrics, notably non-dealers acquiring over 90% of the offering. These developments reinforced market expectations for more than one Federal Reserve interest-rate cut this year, with traders subsequently pricing in 47 basis points of Fed easing by year-end, an increase from 42 basis points, and raising the probability of a September rate cut to approximately 75%. Consequently, yields declined across the curve, with short-dated yields, sensitive to Fed policy, falling by seven basis points, while 10- to 30-year yields reached new lows post-auction. Despite Treasury Secretary Scott Bessent's positive remarks on recent auction performance and declining 10-year yields, concerns persist regarding the upcoming $22 billion 30-year bond auction, as 30-year yields remain approximately 10 basis points higher year-to-date, around 4.91%, influenced by anxieties over wider US government budget deficits.

Key Decisions for Investors

• Investors should assess the strengthened case for Federal Reserve rate cuts following softer inflation data and strong Treasury auction demand, which currently favors holding or acquiring US Treasuries, particularly in the short to intermediate duration segments.
• Maintain a cautious stance on the very long end of the Treasury curve, closely monitoring the upcoming 30-year bond auction for signs of demand resilience, given persistent concerns about fiscal deficits and supply absorption.
• Continue to scrutinize incoming inflation reports and Federal Reserve communications, as these factors will remain pivotal in shaping interest rate expectations and influencing fixed-income market trajectories.