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Treasuries Give Back Ground After Early Move To The Upside

After showing a strong move to the upside early in the session, treasuries gave back ground over the course of the trading day on Wednesday.

Bond prices pulled back well off their best levels of the day, ending the session modestly higher. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, edged down by 1.1 basis points to 2.786 percent after hitting a low of 2.674 percent.

Treasuries initially benefited from a highly anticipated Labor Department report showing consumer prices unexpectedly came in flat in the month of July.

The Labor Department said its consumer price index was unchanged in July after jumping by 1.3 percent in June. Economists had expected consumer prices to edge up by 0.2 percent.

Compared to the same month a year ago, consumer prices in July were up by 8.5 percent, reflecting a bigger than expected slowdown from the 9.1 percent spike in June.

The annual rate of price growth was expected to slow to 8.7 percent from the four-decade high seen in the previous month.

Meanwhile, the report said core consumer prices, which exclude food and energy prices, rose by 0.3 percent in July after climbing by 0.7 percent in June. Core prices were expected to increase by 0.5 percent.

The annual rate of core consumer price growth was unchanged at 5.9 percent, while economists had expected an acceleration to 6.1 percent.

The tamer than expected inflation data has led to speculation that the Federal Reserve will slow the pace of interest rate hikes at its September meeting.

CME Group's FedWatch tool is currently indicating a 62.5 percent chance of a 50 basis point rate hike and a 37.5 percent chance of a 75 basis point rate hike.

"Today's inflation report might lead the Fed to downshift the size of its rate hikes to 50bps in September," said Kathy Bostjancic, Chief U.S. Financial Economist at Oxford Economics.

She added, "However, we still see 75bps as likely given the ongoing inflation pressures, still elevated inflation readings, and ongoing tight labor market that is leading to large wage gains."

The subsequent pullback by treasuries came even though the Treasury Department revealed this month's auction of $35 billion worth of ten-year notes attracted above average demand.

The ten-year note auction drew a high yield of 2.755 percent and a bid-to-cover ratio of 2.53, while the ten previous ten-year note auctions had an average bid-to-cover ratio of 2.47.

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

The Treasury is due to finish off this week's series of announcements of the results of its long-term securities auctions by revealing the results of this month's auction of $21 billion worth of thirty-year bonds on Thursday.

Trading on Thursday may also be impacted by reaction to a pair of Labor Department reports on weekly jobless claims and producer price inflation.

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