Bonds Lower as Auction Ends

The 10-year note stays down in price after this morning's inflation numbers.
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Bonds remained weaker despite another mostly successful auction of government bonds Thursday afternoon, as the seemingly inexorable march toward a 5% yield on the 10-year Treasury note showed few signs of abating.

The 10-year Treasury note was recently down about 6/32 to yield 4.84%, while the 30-year was off 10/32 to yield 5.54%. After crossing the psychologically important yield threshold of 4.8% overnight, bonds sold off earlier on the heels of stronger-than-expected inflation numbers, with the yield on the 10-year Treasury note touching a 20-month high slightly above 4.85%.

Thursday's sale of $15 billion of 10-year notes, the third of three bond auctions held by the federal government this week, drew a low bid of 4.848%. The yield-to-cover ratio, which gauges demand for the available supply, was a solid 2.78, while indirect participation, which is a rough proxy for overseas demand, came to 43.5%. The figure was roughly 20% at the last auction in March.

Bonds continue to price in the market's concern that the

Fed

isn't moving fast enough to quell inflation, with the spread between fed funds and Treasury yields at multiyear highs. Fed funds future contracts currently price in a near-100% chance of a tightening when the Federal Open Markets Committee meets in late June.

Contributing to that concern was a Labor Department report earlier Thursday that showed producer prices rose 0.7% in April, slightly higher than expected. The core rate, which excludes food and energy prices, rose 0.2%. Economists expect the April consumer price index to show a rise of 0.3% when it's released on Friday.