US 10-year yield dips below 3% after Fed minutes show willingness to let inflation tick up

  • The Fed's latest meeting minutes revealed that the central bank would be open to letting inflation temporarily run a bit above its 2 percent target.
  • "The takeaway is that the Fed is getting us comfortable with the fact that their forecast could be above 2 percent," said Michael Materasso, co-chair of Franklin Templeton's fixed-income policy committee.

U.S. government debt yieldsfell Wednesday after the Federal Reserve's latest meeting minutes revealed that the central bank would be open to letting inflation temporarily run a bit above its 2 percent target.

The yield on the benchmark 10-year Treasury note, which moves inversely to price, dropped roughly 7 basis points to 2.995 percent, while the yield on the 30-year Treasury bond shed 6 basis points to 3.154 percent.

Following the May meeting, the policymaking arm of the Fed said it wasn't raising rates yet but added the word "symmetric" to describe its inflation goal. Until now, market participants have debated what that language meant.

Though the general tone was that inflation would continue to rise, there was disagreement over how confident the Fed should be after undershooting its 2 percent target for so long.

"To me, the takeaway is that the Fed is getting us comfortable with the fact that their forecast could be above 2 percent," said Michael Materasso, co-chair of Franklin Templeton's fixed-income policy committee. "It goes to show you that this 2 percent line in the sand should not be a line in the sand, but should be more of a range."

Consumer prices as measured by the personal consumption expenditures price index — the Fed's preferred inflation gauge — jumped 2 percent year-on-year in March, the biggest gain since February 2017.

The rising prices appear to be rising in part thanks to a competitive labor market, with the Labor Department reporting that the unemployment rate fell to 3.9 percent in April, the lowest level since December 2000.

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Tighter labor markets are usually considered a bellwether of labor input wages in classical economics: When workers are in higher demand, employers will typically have to pay more for their services. Wages, in turn, are often seen as a prelude to higher prices throughout the economy as people spend more as their paychecks grow.

"We've seen among the Fed staff – it seems they'd be more comfortable with overheating. Because we've seen an undershooting of the target over the past five years, the Fed could give it time to catch up," said Gene Tannuzzo, senior portfolio manager at Columbia Threadneedle Investments.

Rising inflation, which threatens Treasury prices because it erodes the purchasing power of their fixed payments, puts upward pressure on rates.

The Treasury Department auctioned $36 billion in five-year notes at a high yield of 2.864 percent. The bid-to-cover ratio, an indicator of demand, was 2.52. Indirect bidders, which include major central banks, were awarded 56.2 percent. Direct bidders, which includes domestic money managers, bought 10.9 percent.