Benchmark Treasury yields were little changed Monday, holding near cycle highs as traders eye inflation data midweek.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.927%
eased 3 basis points to 4.927%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
4.073%
rose by less than 1 basis point to 4.076%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
4.063%
added 1.4 basis points to 4.060%.
What’s driving markets
Treasury yields were holding near recent highs as investors continued to price in more interest rate rises by the Federal Reserve amid signs the U.S. economy so far seems little damaged by the central bank’s sharp tightening of policy over the past year or so.
Data released on Friday showed job creation underperforming expectations for the first time in 15 months, but with stubbornly high wage growth ensuring inflation concerns remain embedded.
Markets are pricing in a 92% probability that the Fed will raise interest rates by 25 basis points to a range of 5.25% to 5.50% after its meeting on July 26, according to the CME FedWatch tool.
The central bank is not expected to take its Fed funds rate target back down to around 5% until June 2024, according to 30-day Fed Funds futures.
These figures may change if the consumer price index report due Wednesday shows inflation for June diverging notably from the 3.1% forecast.
U.S. economic updates set for release on Monday include May wholesale inventories at 10 a.m. Eastern. There will be a number of Fed officials making comments, including Fed Vice Chair Barr at 10 a.m.; San Francisco Fed President Daly and Cleveland Fed President Mester at 11 a.m.
News that China’s consumer price inflation is zero and factory gate prices are deflating more than expected appear to have had little impact on the wider fixed income market on Monday.
What are analysts saying
“We expect government bonds to perform much better in the second half of the year, with returns depending critically on the outlook for inflation, central bank policy rates, and associated guidance. On those scores, our economists forecast a supportive environment. Indeed, most bond markets are already pricing the peak central bank policy rates that our economists expect. In some cases, markets price even higher rates,” said Matthew Hornbach, strategist at Morgan Stanley.
“The possibility that central bank hikes to date may weigh on economic activity into year-end, and that any remaining hikes may not come until mid-2024, increases the attractiveness of government bonds, in our view. Hence, while they’ve been battered and bruised, government bonds look primed for a comeback in 2023,” Hornbach added.
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