Impressive Post-CPI Rally Sends Yields To Multi-Month Lows

Tsys initially sank on above-expected May inflation, but decisively reversed course shortly thereafter to session highs with participants looking through the 29-year high in core Y/Y CPI. The curve bull flattened and futures volumes pushed 2M for the first time since the Jun-Sep roll.

• And not at all a risk-off move, given that stocks hit all-time highs. Indeed it was basically one-way traffic lower for yields after the initial spike, with bears appearing to capitulate toward the end of the session.
• The 2-Yr yield is down 0.6bps at 0.1488%, 5-Yr is down 2.1bps at 0.7291%, 10-Yr is down 3.4bps at 1.457%, and 30-Yr is down 1.7bps at 2.1518%. Sep 10-Yr futures (TY) up 5.5/32 at 132-30 (L: 132-10 / H: 132-30.5)
• Implied breakevens headed modestly higher, meaning real yields fell sharply - suggesting market participants both acknowledge higher inflation pressures, while also deferring to the FOMC's insistence that the current spike is only temporary (and that they will be patient before tightening policy).
• The strength in Tsys made an otherwise mediocre 30Y Bond auction look even better given the circumstances - 1.2bps tail, bid-cover a little better than previous auction but weaker than average. While yields bounced off session lows and curve steepened slightly following the auction, the demand for duration was impressive given the lack of concession, and the rally continued afterward.
• It's a quiet calendar from here until the FOMC, with UMich sentiment and a new NY Fed purchase schedule the only things on the data /supply/speaker docket until Tuesday.