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Stronger Inflation Data Lift U.S. Government-Bond Yields

US government bonds fell dramatically on Thursday, taking yields to their highest levels in four weeks, after new data showed consumer prices rose more than expected in June.

The yield on the 10-year benchmark US Treasury note was set at 2,122%, the highest closing since June 12, compared to 2,061% on Wednesday.

Yields, which rise when bond prices fall, rose after the Labor Department said the consumer price index rose 0.1% in June from the previous month, while core prices rose 0 ,3%. Both readings exceeded the estimates of economists polled by The Wall Street Journal. The yields then went a step further after a $ 16 billion auction of 30-year Treasury bonds attracted mild demand from investors.

Investors tend to sell Treasurys in response to strong inflation data, since inflation erodes the purchasing power of fixed bond payments.

Investors and analysts were particularly interested in Thursday's inflation report because it came a day after Federal Reserve Chairman Jerome Powell energetically indicated that the central bank is ready to cut interest rates at the end of the year. of this month, partly in an effort to boost inflation.

Federal funds futures, which investors use to bet on the direction of interest rates, suggested that the Fed could reduce the federal funds rate by 0.50 percentage points, instead of just 0.25 percentage points, at its next meeting It jumped to 29% after Mr. Powell's comments on Wednesday from 3% a day earlier, according to data from the CME Group. The probability dropped to 21% on Thursday after the inflation report.

"A good impression of CPI is not enough to eliminate the table," said Blake Gwinn, rate strategist at NatWest Markets. However, the odds of a 0.50 percentage point cut have declined "as we got a couple of strong data impressions."

The CPI report also boosted the 10-year equilibrium rate, a market-based measure of annual inflation expectations over the next decade based on the extra yield demanded by investors to keep the 10-year Treasury on securities at 10 Treasury years protected by inflation -At 1.76% on Thursday, compared to 1.73% on Wednesday, according to Refinitiv.

Signs that the Fed will try to preserve economic expansion by lowering interest rates have provided a big boost to corporate bonds in recent weeks.

According to Bloomberg Barclays data, the average additional yield, or the extent, that investors demand to maintain corporate bonds with US investment grade. UU On Treasurys, it was settled on Wednesday at 1.13 percentage points. That fell from a recent high of 1.30 percentage points on June 3 and close to the 2019 low of 1.09 percentage points set in April.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

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It appeared in the print edition of July 12, 2019 as "Treasury yields rise to the highest in four weeks."

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