(Updates with latest yields, adds subsequent economic data, Iran developments in paragraphs)
WASHINGTON, May 28 (Reuters) – Yields on benchmark U.S. Treasury notes fell on Thursday as the United States and Iran reached an agreement on a memorandum of understanding to extend their ceasefire for another 60 days, a step toward ending their three-month-old war. Earlier, yields had eased off session highs following a batch of mixed U.S. economic data showing weaker growth, faltering capital expenditures and steady inflation. The less-than-stellar economic numbers could ease pressure on the US central bank to maintain or raise interest rates.
“What the numbers point to today is simply that we have a stagflation problem,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “And that’s a big problem for the Fed.”
Meanwhile St. Louis Federal Reserve President Alberto Musalem told an economic conference in Iceland on Thursday that the U.S. central bank may in fact need to increase its policy rate if inflation does not resume easing within the next six months.
A $44 billion auction of 7-year US Treasury notes in the afternoon showed demand a touch above average at 2.52 times the notes on sale.
Earlier on Thursday, Iran targeted a U.S. air base in Kuwait following a U.S. strike on what American officials called an Iranian drone operation near the Strait of Hormuz. The renewed violence underscored the fraught nature of negotiations to turn April’s tenuous ceasefire into an agreement to end the three-month-old war that has choked global fuel supplies and clouded the outlook for U.S. monetary policy.
Separately, the U.S. reported on Thursday that the pace of new home sales had slowed in April. The Commerce Department is also due on Friday to release April data on the U.S. trade balance.
The yield on the benchmark U.S. 10-year Treasury note was last down 2.4 basis points to 4.457%. The yield on the 30-year bond had fallen2.4 basis points to 4.987%.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 43.0 basis points.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 0.8 basis points to 4.025%.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.554% after closing at 2.551% on May 27.
The 10-year TIPS breakeven rate was last at 2.406%, indicating the market sees inflation averaging about 2.4% a year for the next decade. (Reporting by Douglas Gillison in Washington; additional reporting by Stephen Culp in New York Editing by Nick Zieminski)
