Why Do U.S. Bond Yields Keep Declining?

U.S. bond yields experienced a significant setback on Thursday following the release of producer price indices that fell below expectations, heightening anticipation that the Federal Reserve may lower interest rates before year-end. Yields were further pressured by robust demand for U.S. government bonds, driven by their inverse relationship with bond prices. This surge in demand, which elevated bond values, was fueled by global investors seeking to mitigate risks amid heightened market volatility, escalating geopolitical tensions in the Middle East, and potential disruptions in trade negotiations between the United States and its trading partners.

The yield on 10-year U.S. Treasury notes dropped to 4.360%, down from the previous day’s close of 4.427%. During Thursday’s trading session, yields fluctuated between a high of 4.427% and a low of 4.346%.

Inflation Data

The U.S. Producer Price Index (PPI) increased by 0.1% in May, rebounding from April’s decline of 0.2%, but fell short of market forecasts of a 0.2% rise. On an annual basis, the PPI climbed to 2.6% in May, up from 2.5% the previous month, aligning with expectations of stable price growth.

Excluding volatile food and energy components, the core PPI rose 0.1% in May, compared to a 0.2% decline in April, underperforming market projections of a 0.3% increase. Annually, the core PPI reached 3.0% in May, down from 3.2% the prior year and below the anticipated 3.1%.

Data released on Wednesday revealed that U.S. consumer price inflation also undershot expectations, signaling a continued slowdown in price growth in May, according to the Bureau of Labor Statistics. The Consumer Price Index (CPI) rose 0.1% in May, down from 0.2% in April, contrary to expectations of unchanged prices. Annually, the CPI increased to 2.4% in May from 2.3% the prior month, missing forecasts of 2.5%.

Core CPI, which excludes food and energy, declined by 0.1% in May, compared to a 0.2% rise in April, falling below expectations. On an annual basis, core CPI remained steady at 2.8%, below the projected 2.9%.

Geopolitical and Trade Tensions

U.S. President Donald Trump has intensified trade disputes by threatening to impose unilateral trade terms on several trading partners, raising concerns about further economic friction. Concurrently, fears of geopolitical instability in the Middle East have escalated after U.S. authorities ordered the partial evacuation of embassy staff in Baghdad amid Iranian threats targeting U.S. interests in the region.