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Treasuries Close Firmly Negative After Failing To Sustain Initial Upward Move

After an early move to the upside, treasuries showed a notable downturn over the course of the trading session on Thursday.

Bond prices pulled back well off their early highs, ending the day firmly negative. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, jumped 10.2 basis points to 2.888 percent after hitting an early low of 2.730 percent.

The initial strength among treasuries came after the Labor Department released a report showing an unexpected decrease in producer prices in the month of July.

The Labor Department said its producer price index for final demand fell by 0.5 percent in July after surging by a revised 1.0 percent in June. The decrease marked the first drop in producer prices since April 2020.

The pullback came as a surprise to economists, who had expected producer prices to edge up by 0.2 percent compared to the 1.1 percent jump originally reported for the previous month.

The report also showed the annual rate of producer price growth slowed to 9.8 percent in July from 11.3 percent in June. Economists had expected the annual rate of growth to slow to 10.4 percent.

Meanwhile, the Labor Department said core producer prices, which exclude prices for food, energy and trade services, crept up by 0.2 percent in July after rising by 0.3 percent in June.

The annual rate of core producer price growth also slowed to 5.8 percent in July from 6.4 percent in the previous month.

The subsequent downturn by treasuries mirrored the performance seen in the previous session, when bond prices pulled back well off their early highs despite tamer than expected consumer price inflation data.

The inability to sustain early upward moves may reflect expectations that slower interest rate hikes by the Federal Reserve will reduce the likelihood of a recession and thus reduce the safe-haven appeal of bonds.

Treasuries saw further downside after the Treasury Department revealed that this month's auction of $21 billion worth of thirty-year bonds attracted modestly below average demand.

The thirty-year bond auction drew a high yield of 3.106 percent and a bid-to-cover ratio of 2.31, while the ten previous thirty-year bond auctions had an average bid-to-cover ratio of 2.34.

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 revealed earlier this week that this month's auctions of $42 billion worth of three-year notes and $35 billion worth of ten-year notes both attracted above average demand.

Trading on Friday may be impacted by reaction to readings on U.S. import and exports prices and consumer sentiment and inflation expectations.

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