Renewed Inflation Fears Push Treasury Yields Higher

US wholesale inflation rose more than expected last month. July registered a 0.3% month-on-month increase in Producer Prices (PPI), exceeding market expectations of 0.2% and marking the most significant surge since January. This followed June's downwardly revised stagnation. Since PPI captures average price fluctuations prior to reaching consumers, acting as an indicator for potential store price changes, this news punctures the "Fed done" speculation. 

Treasury yields jumped again on the news. The U.S. 10-year Treasury yield soared to 4.15% (+11 basis points) while the 2-year yield finished the week above 4.89% (+12 basis points). The greenback strengthened after the inflation data. The dollar index closed at 102.85, up 0.81% for the week. Furthermore, the Federal Reserve continues to shrink its balance sheet with a $35 billion reduction over the first two weeks of August. 

In Europe, Treasury yields followed suit. The yield on the German 10-year Bund rose by 6 basis points from 2.56% to 2.62% while the yield on the French 10-year OAT gained 5 basis points from 3.10% to 3.15%.

Against this backdrop, investment grade corporate bond prices dropped again. In Europe, the IBOXX € Liquid Corporates index edged down 0.20%. In the U.S., the IBOXX $ Domestic Corporates index slid 0.23% extending its losing streak to four weeks.

In contrast, high yield bonds advanced 0.24% in Europe (IBOXX € Liquid High Yield Index) and 0.32% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index). Emerging debt in local currencies ended the week down 0.18%.