Treasury yields steady as softer inflation meets higher oil prices

U.S. Treasury yields were little changed on Wednesday as traders balanced a weaker-than-expected wholesale inflation reading against another rise in oil prices. CNBC reported that the 10-year Treasury yield, a reference rate for mortgages, auto loans and credit card borrowing, was less than 1 basis point lower at 4.581%, while the policy-sensitive 2-year yield fell more than 2 basis points to 4.166%.

The 30-year Treasury yield was less than 1 basis point higher at 5.104%, according to CNBC. A basis point is one-hundredth of a percentage point, and bond yields move in the opposite direction to prices.

The producer price index declined 0.3% in June, CNBC reported. Economists surveyed by Dow Jones had expected the index to be unchanged from the prior month. The data followed a softer consumer inflation report on Tuesday, when the consumer price index fell 0.4% in June and its annual increase slowed to 3.5%, according to CNBC.

Lower inflation readings can reduce pressure on the Federal Reserve to raise interest rates, because they suggest less need to restrain demand through tighter monetary policy. Shorter-dated Treasury yields, including the 2-year note, tend to be more sensitive to expected changes in the Fed’s policy rate than longer maturities.

Chris Rupkey, chief economist at FWDBONDS, told CNBC that the central bank’s fight against inflation was not finished, citing testimony from Fed Chair Warsh, but said the latest factory-level data were encouraging. He said the odds of further Fed rate increases should keep easing as producer inflation trends lower and companies appear less likely than previously thought to pass higher costs through to consumers.

Oil prices complicated the market reaction. CNBC reported that crude moved higher on Wednesday after U.S. Central Command said the United States launched fresh strikes on Iran. West Texas Intermediate futures were trading above $79 a barrel, while Brent crude, the international benchmark, was above $85, according to CNBC.

Energy prices can feed into inflation through transport, production and household fuel costs, though the degree and timing of pass-through vary across the economy. That makes oil a key input for bond traders assessing whether disinflation can continue without renewed price pressure from commodities.

Meghan Shue, chief investment strategist at Wilmington Trust, told CNBC’s “Morning Call” that core inflation still suggested higher energy costs had not materially filtered into broader inflation, while tariff-related pressures were fading. She said continued disinflation could allow the Fed to cut rates by the end of the year.

CNBC reported that Tuesday’s consumer price data had already helped pull down market expectations for a July Fed rate increase. Wednesday’s muted yield moves showed investors weighing that inflation relief against geopolitical risks and the potential inflation effects of firmer crude prices.

This story draws on original reporting from CNBC.