Yields drop after supply passes, despite higher inflation

NEW YORK (Reuters) - Bond yields fell on Friday after the U.S. Treasury on Thursday completed $108 billion in supply this week, and as investors remained doubtful that inflation will increase much even as consumer prices rose more than expected in August.

The supply has weighed on the market this week, with the Treasury selling a record amount of three-year notes as well as the largest reopenings of 10-year notes and 30-year bonds in history.

Bond yields also fell after data showed an increase in consumer prices last month.

The Labor Department said its consumer price index rose 0.4% in August, marking its third consecutive monthly increase.

“You have to take (the data) with a grain of salt, because there’s a lot of dislocation that’s going on because of the virus and the lockdown,” said Lou Brien, a market strategist at DRW Trading in Chicago.

U.S. 10-year yields reflect pessimism that the Federal Reserve will be able to lift inflation to its target, despite fiscal stimulus and ongoing quantitative easing, Brien said.

The yields are “the dog that didn’t bark,” he said. “The last three consumer price index numbers were stronger than expected, and I think that it’s interesting that in spite of that, the 10-year is still sitting right around 0.67%.”

The 10-year note yields US10YT=RR fell two basis points on the day to 0.669%.

The next major focus will be next week’s Fed policy meeting, where the U.S. central bank will update its economic projections. Investors will also be watching for any new details on its new framework that will include allowing inflation to run higher than previously before raising interest rates.

September 11 Friday 3:06PM New York / 1906 GMT

Editing by Chizu Nomiyama