Treasuries Move Back To The Upside Following Inflation Data, 10-Year Note Auction

(RTTNews) - Following the pullback seen in the previous session, treasuries showed a strong move back to the upside during trading on Wednesday.

Bond prices moved modestly higher early in the session and climbed more firmly into positive territory as the day progressed. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, slid 4.2 basis points to 4.032 percent.

The ten-year yield more than offset the 2.8 basis point increase seen on Tuesday, falling to its lowest closing level since slipping below 4.0 percent in early April.

The early strength among treasuries came following the release of a Labor Department report unexpectedly showing a modest decrease by producer prices in the U.S. in the month of August.

The Labor Department said its producer price index for final demand edged down by 0.1 percent in August after climbing by a downwardly revised 0.7 percent in July.

The dip surprised economists, who had expected producer prices to rise by 0.3 percent compared to the 0.9 percent jump originally reported for the previous month.

The report also said the annual rate of producer price growth slowed to 2.6 percent in August from a downwardly revised 3.1 percent in July.

Economists had expected the annual rate of producer price growth to remain unchanged compared to the 3.3 percent surge originally reported for the previous month.

The data added to recent optimism about the Federal Reserve lowering interest rates by at least a quarter point at its monetary policy meeting next week.

Following the report, CME Group's FedWatch Tool is currently indicating a 90.1 chance of a quarter-point rate cut and a slim 9.9 percent chance of a half-point rate cut.

Treasuries saw further upside after the Treasury Department revealed this month's auction of $39 billion worth of ten-year notes attracted above average demand.

The ten-year note auction drew a high yield of 4.033 percent and a bid-to-cover ratio of 2.65, while the ten previous ten-year note auctions had an average bid-to-cover ratio of 2.56.

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

The Labor Department's report on consumer price inflation is likely to be in focus on Thursday, as it may shed additional light on the outlook for interest rates.