US 30-year yield tops 5% as CPI fails to quell inflation fears

Treasury yields rose Tuesday despite benign consumer prices data as traders focused on the potential for tariff-driven inflation further down the line.

Short-dated yields most sensitive to Federal Reserve interest-rate changes led the move, rising more than four basis points, as yields across tenors reached the highest levels in several weeks. The 30-year bond’s yield touched 5% for the first time since early June. 

Initially, the June CPI data, which included a smaller-than-estimated increase in prices excluding food and energy, sparked gains that sent yields to session lows. However it also had elements suggesting that the inflation gauge targeted by the Fed — to be released at the end of the month — may increase more than economists previously expected.

Inflation data is a principal driver of bond-market sentiment because Fed policymakers have said they’re waiting to see the fallout from the new US administration’s tariffs agenda before considering resuming interest-rate cuts. Traders priced in somewhat lower odds that the Fed will cut rates more than once this year, and the probability of a move in September is now seen as only slightly higher than 50%.

“Despite the slightly softer core print, there appears to be inflation passthrough coming from tariffs, which should pressure prices higher in coming months,” said Gennadiy Goldberg, TD’s head of US interest-rate strategy.

The 30-year Treasury yield peaked this year at about 5.15% after Moody’s Ratings on May 16 stripped the US of the highest credit score, several years after other debt rating agencies took the same action, based on eroding fiscal metrics. Last year’s peak, near 5.18%, was the highest 30-year yield since 2007.

In Treasury options trading Tuesday, an apparent wager was made at a cost of about $10 million that the 30-year yield will rise to 5.3% by Aug. 22. September put options on CME Group’s Treasury Bond Futures contract with a 108.00 strike price were bought via two block trades totaling 22,500 contracts. The puts convey the right to sell the underlying futures contract at the strike price. Its price at the time was 112-09.

What Bloomberg strategists say:

“Treasury losses are deepening as investors shift focus to the Fed’s preferred inflation gauge. With concerns that it may prove less benign than core CPI, buyers have stepped back.” 

—Alyce Andres, US Rates/FX Strategist, Markets Live

The CPI report showed tariffs are starting to lift the prices of some products. Categories that are more exposed to tariffs, including toys, furniture, appliances and apparel, showed strength, suggesting companies are starting to pass higher import on to consumers.

Prices overall rose 0.3% in June, in line with the median estimate of economists in a Bloomberg survey, and the year-on-year rate accelerated to 2.7% vs a median estimate of 2.6%.

“You may be seeing some tariff passing-through, but it didn’t go up much as feared, which gives you some relief,” said John Briggs, head of US rates strategy at Natixis North America LLC. “But you need to wait and see if you get the tariff pass-through in the coming months.”

Inflation expectations

Market-implied inflation expectations increased, some to the highest levels since February. The expectations arise from the differences between Treasury yields and the lower yields of inflation-protected Treasury securities. The gaps represent the average CPI inflation rate needed to equalize their returns. For the 10-year tenor, it increased to 2.42%.

Using data from the CPI report, economists at Citigroup Inc. and Bank of America Corp. estimated that the core version of the Fed’s preferred inflation gauge rose 2.8% in June from a year earlier vs 2.7% in May. On Wednesday, a report on June producer prices may allow for further refinement of estimates.

Bank of America strategists including Meghan Swiber recommended positioning for inflation expectations to be higher for the US than for the euro-zone, and for a drop in the amount of Fed easing priced in through year-end.

Traders this month have whittled the odds of Fed easing. Strong June employment data released July 3 led them to rule out a cut after the next meeting concludes July 30 and to downgrade the chances of a September cut, which was fully priced in as recently as late June.

The Fed will see two additional CPI readings before its September decision. Chair Jerome Powell has said that officials need more time to gauge the impact of tariffs before cutting rates, advocating patience in the face of the Trump administration’s relentless public pressure on the Fed to lower borrowing costs.

US President Trump reiterated his call for the Fed to cut interest rates on Tuesday, citing “very low inflation.”

Clarity about tariff-related inflation has been elusive as the administration has repeatedly set and extended deadlines for reaching trade agreements. 

Following a bout of extreme volatility in early April when the tariffs agenda was unveiled, yields have settled into narrow ranges, and a measure of expected volatility in Treasuries has tumbled to the lowest level in more than three years.

Following the CPI report, Treasury options flows include a sale for $6 million of a 10-year note September strangle, a wager on lower volatility.