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The 10-year Treasury yield fell on Wednesday.

KAREN BLEIER / AFP via Getty Images

Movements in the Treasury market this week pose a puzzle for investors: Why, before a report that could show high headline inflation, are traders buying bonds that are yielding less than 1.5%?

The 10-year yield has just fallen outside the range where it has been stuck for months, to its lowest point since early March.

And not only are investors buying US bonds, driving down yields, they seem to want to buy them directly from the US government. A Wednesday auction of $ 38 billion of 10-year notes fetched $ 2.58 in auction for every dollar sold. This was the highest demand since July 2020, when there was no Covid-19 vaccine available yet and Treasury yields had yet to hit their lowest pandemic level.

On Wednesday, the primary dealers – the government counterparties that are required to bid at auctions – ended up buying about 15.7% of the auction, the lowest since 2016, according to Bloomberg data. (The low allocations to primary traders tend to be seen as a sign of robust demand, since they are the only group required to bid.) The auction yield was also lower and prices were higher than the price. indicated derivative trades prior to the auction.

The 10-year yield fell almost five basis points, or hundredths of a percentage point, to 1.49% in afternoon trading after the sell off.

Part of the reason for the demand may have been traders who had bet against the 10-year Treasury in futures markets seeking to close (or “hedge”) their bearish positions, the Jefferies strategists wrote. But there had been a decent amount of “short-covering that seemed to come before the auction,” strategists said, which “made it difficult to predict an aggressive bid for today’s bid. Apparently, these concerns were misplaced.

Longer-term, bond traders have lowered their inflation prices since mid-May, when the Federal Reserve meeting minutes indicated that officials were starting to think about a timeline to pull out of their bonds. $ 120 billion in monthly treasury bill and mortgage purchases. backed securities. Last week’s jobs report showed healthy jobs and wage growth, but wasn’t enough to explode (or miss) to be a game-changer for bond investors.

Pricing market inflation is important because it implies that investors believe the Fed has inflation under control – or at least that officials will act to address it before prices start to persistently and damagingly rise. .

Movements could still reverse if tomorrow’s consumer price index is surprisingly strong, of course. But if the latest Treasury bill yield cuts (and price gains) are an implicit bet on the Fed’s credibility, it may take more than a few good impressions from the CPI to break that trend.

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