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Treasuries Move Notably Lower On Inflation Data, Auction Results

After ending the previous session roughly flat, treasuries showed a notable move to the downside over the course of the trading day on Thursday.

Bond prices moved modestly lower early in the session and slid more firmly into negative territory as the day progressed. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, climbed 5.9 basis points to 2.120 percent.

The ten-year yield continued to recover from the more than two-year low set last Wednesday to reach its highest closing level in a month.

The weakness among treasuries came after a report from the Labor Department showed an unexpected uptick in U.S. consumer prices in the month of June.

The Labor Department said its consumer price index inched up by 0.1 percent in June, matching the slight increase seen in May. Economists had expected consumer prices to come in unchanged.

Excluding food and energy prices, core consumer prices rose by 0.3 percent in June after inching up by 0.1 percent for four consecutive months. Core prices had been expected to edge up by 0.2 percent.

Andrew Hunter, Senior U.S. Economist at Capital Economics, does not expect the stronger than expected core consumer price growth to prevent the Federal Reserve from cutting interest rates later this month and expressed doubt the strength will be sustained.

"Higher tariffs could yet put some further upward pressure on core goods prices over the coming months but, with growth in unit labor costs slowing, we still think core CPI inflation will remain muted," Hunter said.

He added, "With the latest surveys pointing to a sharp slowdown in activity growth, we expect the Fed to follow a 25bp rate cut this month with further cuts in December and March next year."

A separate Labor Department report showed first-time claims for U.S. unemployment benefits unexpectedly fell in the week ended July 6th.

The report said initial jobless claims dropped to 209,000, a decrease of 13,000 from the previous week's revised level of 222,000. Economists had expected jobless claims to inch up to 223,000.

Treasuries saw some further downside following the release of the results of the Treasury Department's auction of $16 billion worth of thirty-year bonds, which attracted below average demand.

The thirty-year bond auction drew a high yield of 2.644 percent and a bid-to-cover ratio of 2.13, while the ten previous thirty-year bond auctions had an average bid-to-cover ratio of 2.26.

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

Earlier this week, the Treasury revealed its auction of $38 billion worth of three-year notes and $24 billion worth of ten-year notes also attracted below average demand.

Inflation data may continue to attract attention on Friday, as the Labor Department is scheduled to release its report on producer prices in June.

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