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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

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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.