2-year Treasury yield ends at lowest since May after producer prices data

What happened

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  fell 12.2 basis points to 4.136% from 4.258% on Thursday. Friday’s level was the lowest since May 16, based on 3 p.m. Eastern time figures from Dow Jones Market Data. For the week, the rate dropped 25.3 basis points, its biggest weekly decline in four weeks.

• The yield on the 10-year Treasury
  BX:TMUBMUSD10Y
  ended at 3.949%, down 2.5 basis points from 3.974% on Thursday. Friday’s level was the lowest since Jan. 3. For the week, the 10-year rate declined 9.2 basis points.

• The yield on the 30-year Treasury
  BX:TMUBMUSD30Y
  rose 1.8 basis points to 4.197% after factoring in reopening levels. For the week, the 30-year rate ended marginally lower.

What drove markets

Data released on Friday showed that U.S. wholesale prices fell for a third month in a row in December, suggesting inflation could decelerate in the months ahead.

The report came after traders looked beyond Thursday’s stronger-than-forecast consumer price data and clung to the view that inflation should keep falling toward the Federal Reserve’s 2% target this year.

This disinflationary take is what led to the spread on 2- and 10-year yields turning less negative than any time in the past two months. It finished the New York session at minus 18.7 basis points.

Meanwhile, oil prices
CL00,
+1.26%

CL.1,
+1.26%
settled higher Friday, but still suffered a weekly loss, after a U.S.-led coalition launched airstrikes on Houthi targets to reduce the threats to international shipping in the Red Sea — further complicating the inflation picture.

What economists are saying

“The message from the PPI report is very clear: Inflation is headed lower,” said Bill Adams, chief economist for Comerica Bank. “Other leading indicators of the CPI, like the ISM PMI price surveys, likewise show that business input costs are much less inflationary than in 2021 or 2022 and that inflation is headed lower as 2024 begins.

“The path continues to clear for the Fed to begin cutting interest rates in 2024 and to slow the pace at which they shrink their balance sheet. Comerica forecasts a first quarter percentage point federal-funds rate cut at the June FOMC decision, and for the Fed to begin slowing balance sheet run-off in the second half of the year,” he wrote in an email. “The key upside risk to inflation is from the war in the Middle East and potential disruptions to trade flows and global energy supplies.”