Treasuries Come Under Pressure On Troubling Inflation Data

(RTTNews) - With the latest consumer price data raising concerns about inflation, treasuries moved notably lower during trading on Tuesday.

Bond prices fell rather sharply in early trading and remained firmly negative throughout the session. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, jumped 5.8 basis points to 2.655 percent.

The increase by the ten-year yield more than offset the sharp pullback seen last Thursday, lifting the yield to its highest closing level in over a month.

Treasuries came under pressure following the release of a report from the Labor Department showing that consumer prices rose at their fastest pace in over a year in the month of May.

The consumer price index rose by 0.4 percent in May, the biggest monthly increase since February of 2013. Economists had expected consumer prices to edge up by about 0.2 percent.

Core consumer prices, which exclude food and energy prices, increased 0.3 percent in May after rising by 0.2 percent in the previous month. Core prices had also been expected to tick up by 0.2 percent.

With the continued increase in prices, the annual rate of consumer price growth accelerated to 2.1 percent in May from 2.0 percent in April, representing the biggest increase since of October of 2012.

The annual rate of core consumer price growth also climbed to 2.0 percent in May from 1.8 percent in the previous month.

Peter Boockvar, managing director at the Lindsey Group, said, "While the Fed wants to look at the PCE measure of inflation, the CPI for the 2nd straight month is at their target level and the upward trend may not just stop here."

"The relevance of course, outside for those whose wages are rising only in line with CPI (average hourly earnings in May were also up 2.1%), is whether the Fed can really wait until the middle of 2015 before raising interest rates," he added.

Meanwhile, traders largely shrugged off a separate report from the Commerce Department showing that housing starts pulled back by more than expected in May.

The report said housing starts fell 6.5 percent to an annual rate of 1.001 million in May after jumping 12.7 percent to a rate of 1.071 million in April. Economists had expected starts to drop to a rate of 1.030 million.

While the Federal Reserve will be in the spotlight on Wednesday, trading activity may be somewhat subdued in the lead up to the monetary policy announcement at 2 pm ET.

The Fed is widely expected to announce another $10 billion reduction in the pace of asset purchases, but traders are likely to focus more on the language of the accompanying statement and the outlook for interest rates.

Along with the statement, the Fed is due to provide an update to its economic projections and Fed Chair Janet Yellen is scheduled to hold a press conference.