July 14, 2020 / 7:33 PM / 23 days ago

TREASURIES OUTLOOK-Yields and inflation expectations dip as consumer prices stay benign

NEW YORK, July 14 (Reuters) - U.S. Treasury yields and inflation expectations both dipped on Tuesday after data showed that core inflation remained well under the Fed’s target in June.

U.S. consumer prices rebounded by the most in nearly eight years in the month, but a resurgence in new COVID-19 cases after the reopening of businesses suggests a moderation in demand that could keep inflation muted and allow the Federal Reserve to keep injecting money into the ailing economy.

Core inflation rose 0.2% on the month but remained at 1.2% on the year, below the Fed’s target of 2%.

“I think broadly speaking the market’s really focused on the core year-on-year,” said Subadra Rajappa, head of U.S. interest rate strategy at Societe Generale in New York. “Markets (are) coming to the realization that inflation is perhaps going to be well below the 2% target for the foreseeable future.”

Benchmark 10-year yields fell three basis points to 0.615%. The yield curve between two-year and 10-year notes was little changed on the day at 46 basis points.

Breakeven rates on 10-year Treasury Inflation-Protected Securities (TIPS), which measure expected inflation, fell to 1.376%, from 1.382%.

Yields on the 10-year TIPS, known as “real yields” as they adjust for expected inflation, have dropped to minus 0.80% from minus 0.40% at the beginning of June as inflation expectations rise.

But the drop in real yields also reflects concerns about growth going forward, said Rajappa.

“It doesn’t really send a very positive sign on real growth over the longer run,” she said.

Fed officials also expressed growth concerns on Tuesday.

There is a great deal of uncertainty about the path ahead for the U.S. economy and the Fed should use forward guidance and large-scale asset purchases for a “sustained” period in order to help the recovery, Fed Governor Lael Brainard said.

U.S. unemployment could rise again as businesses adjust to a likely longer recession than first anticipated, and initiatives like the Paycheck Protection Program expire, Richmond Fed president Thomas Barkin said.

Data on Monday showed that the year-to-date U.S. fiscal deficit soared to $2.7 trillion in June as the government spends on coronavirus relief programs and sees a drop in individual and corporate tax receipts. This far eclipsed the previous full-year record of $1.4 trillion in 2009.

Reporting by Karen Brettell; editing by Jonathan Oatis

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