US yields rise as political uncertainty counters deflation optimism

(Updates yields, adds analyst comments, chart)

Davide Barbucia

NEW YORK (Reuters) – U.S. Treasury yields rose on Thursday, reversing a decline the previous day, as uncertainty over the U.S. presidential election and impending French parliamentary elections offset a boost in confidence due to slowing U.S. inflation.

A key inflation gauge showed price pressures eased as expected in May, pushing down yields, which move inversely to prices, strengthening the case for starting monetary easing later this year.

But President Joe Biden’s shaky performance against Republican rival Donald Trump in the first 2024 US presidential debate on Thursday raised speculation about whether Trump might seek a second term and put concerns about the long-term trajectory of US fiscal and monetary policy in the spotlight for the day.

“The debate is relevant as the Trump campaign supports economic growth, the stock market and higher tariffs, which bode well for upward pressure on inflation in the longer term,” said Padraic Garvey, head of research for the Americas at ING.

Garvey added that shorter-term notes were more directly affected by the prospect of interest rate cuts this year, while longer-term notes reflected ongoing concerns about rising U.S. debt issuance.

“That’s the vulnerability going forward. On the surface, there’s data that’s favorable for the outlook for rate cuts, but ultimately you start thinking about the longer-term outlook,” Garvey said.

Meanwhile, French government bond yields

Rising on Friday

Ahead of the first round of France’s general election on Sunday, opinion polls suggest the far right could win.

John Velis, Americas macro strategist at BNY, said the prospect of “populist politics and perhaps a lack of fiscal restraint” in France may have led to a rise in Treasury yields as investors were unwilling to take long bond positions over the voting weekend.

While political uncertainty is pushing up long-term interest rates, the rise in short-term rates is likely due to the Chicago Purchasing Managers’ Index (PMI) being much stronger than expected, countering views of a sharp economic slowdown, Bellis said.

Earlier in the day, the release of personal consumption expenditures (PCE) price index data increased the likelihood of the Fed cutting interest rates in September, but later on Friday futures contracts linked to the policy rate suggested a 0.25 percentage point cut in September was 59.5% likely, unchanged from Thursday, according to CME Group data.

The yield on the benchmark 10-year Treasury note was last at 4.34%, up about 5 basis points since Thursday, down 18 basis points since the beginning of June and up 14 basis points since the beginning of the second quarter.

The yield on the two-year note was little changed at 4.72% on Friday, after falling 17 basis points in June but rising 10 basis points in the second quarter.

Looking further ahead, the 30-year Treasury yield rose 7 basis points to 4.5% on Friday, falling 15 basis points at the end of the month but up 17 basis points for the quarter.

The yield spread between two-year and 10-year bonds remains significantly negative but narrowed to minus 38 basis points, the lowest level in about a month.

An inversion in that part of the yield curve occurs when shorter-term Treasury yields exceed longer-term Treasury yields and is closely watched by investors because it historically signals a looming economic downturn.

(Reporting by Davide Barbuscia; Editing by Chizu Nomiyama, Nick Zieminski and Paul Simao)