Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., June 4, 2025.
Brendan McDermid | Reuters
Key readings on inflation combined with two critical Treasury auctions this week offer a major test for the battered bond market.
On the inflation front, the Bureau of Labor Statistics releases separate reports for May — consumer prices on Wednesday, then producer prices on Thursday.
While economists are looking for only modest increases from both, any upside surprises could rattle investors wary of inflation pressures, primarily stemming from President Donald Trump’s tariffs, that could threaten the labor market and economic growth.
At the same time, the government debt sales, because they involve long-duration securities, will provide important clues about investor appetite for Treasurys at a time when debt and deficits are attracting increased attention both in financial markets and from economists. The Treasury Department will sell $39 billion of 10-year notes Wednesday, then $22 billion of 30-year bonds Thursday.
Richard de Chazal, macro analyst at William Blair, wrote that the auctions in particular are “shaping up to be a referendum on government debt policies” even as market indicators “have been gently moderating over the last couple of weeks and not indicative of any major near-term inflationary stress.”
Together, the results could have important implications for the direction of the economy and the reaction of the Federal Reserve and its approach to interest rate policy. Throw in the spending bill making its way through Congress, and it sets up the fixed income market for more volatility.
“At the risk of being trite, this time it’s different. A big reason is because the deficit level is much higher,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies. “The reason why it’s also different is sometimes things crack, suddenly. It is very difficult to predict when exactly the crack is going to come.”
Multiple concerns at play
Indeed, the debt and deficit situation has emerged as an important backdrop for bonds after the market ignored the swelling government red ink for years. Yields have surged as investors have demanded higher compensation for holding what has always been considered a risk-free investment in U.S. government debt.
Treasury yields soar
Other concerns include Trump’s “big, beautiful” spending bill, as well as what ultimately will be the extent of his tariffs.
“We are still continuing in a relatively benign atmosphere,” Sri-Kumar said. “But the unknown here is that I am very worried about the yield suddenly shooting up.”
This week’s results, then, will be watched closely, even if economists and investors largely are not expecting any major surprises.
On the consumer price index, economists are expecting a 0.2% monthly increase and a 2.4% annual rate; excluding food and energy, core CPI is projected at 0.3% and 2.9% respectively. On producer prices, which contracted in April, the outlook is 0.2% on headline and 0.3% on core.
The bond auctions are a little more nuanced in what the market watches. Important factors include how much primary dealers take compared to indirect bidders; the amount of bids compared to the sale amount; and the “tail,” or the highest accepted yield against where the security was trading on a when-issued basis prior to the sale.
The BLS will release the CPI and PPI readings at 8:30 a.m. ET on their respective dates. The auction results come out at 1 p.m. ET.
Both 10-year and 30-year debt have seen yield surges since the Fed cut in September, taking another leg up after Trump’s “Liberation Day” tariff announcement April 2.
“If you look at where yields are now relative to our global peers, we still have a relatively attractive advantage there,” said Chip Hughey, head of fixed income at Truist Advisory Services. “I would expect there to be pretty sturdy demand as well, especially the 10-year auction.”
Hughey expects that investors likely already have priced in the fiscal issues as well as concerns over tariffs and inflation.
“The ongoing data shows that the economy is cooling, whether it’s the employment numbers or consumer demand,” he said. “That will continue to keep [an] appetite for U.S. Treasurys.”
