Treasury yields held mostly steady on Tuesday, though the 10-year rate finished below 4%, as traders awaited Wednesday’s consumer price index report for June.
What happened
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.877%
rose 3.2 basis points to 4.894% from 4.862% on Monday. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.961%
retreated 2.6 basis points to 3.980% from 4.006% late Monday. The 10-year yield is down 6.7 basis points over the last two trading sessions, according to 3 p.m. Eastern time figures from Dow Jones Market Data. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
4.004%
fell 2.3 basis points to 4.019% from 4.042% Monday afternoon.
What drove markets
U.S. yields were mixed as traders positioned ahead of June’s consumer price inflation data on Wednesday, which may seal the deal on another interest-rate rise by the Federal Reserve later this month.
The 10-year Treasury yield was back below 4% after news on Monday of falling prices in the used-car market and lower household inflation expectations counteracted last week’s reports on a sturdy labor market.
Markets are pricing in a 92.4% probability that the Fed will raise its main interest-rate target by 25 basis points to a range of 5.25%-5.5% on July 26, according to the CME FedWatch Tool. The central bank is expected to take its fed-funds rate target back down to around 5% or lower next year.
Meanwhile, U.K. 2-year gilt yields
TMBMKGB-02Y,
flirted with 15-year highs around 5.4% after data showed annual growth in employees’ average total pay, which includes bonuses, was 6.9% in the three-month period that ended in May.
Bank of England Gov. Andrew Bailey has said such wage growth is driving inflationary pressures, and the central bank is expected to raise interest rates from the current 5% level to a cycle peak of 6.5%.
What analysts are saying
“Taking a step back, we’ll offer the observation that throughout 2022, trading direction in the U.S. rates market wasn’t particularly concerned with the distinction between headline and core inflation,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery. “The simple fact that both measures of consumer prices were running so hot made any comparison a moot point.”
With headline inflation poised to print at 3.1% on a yearly basis, “it’s worth noting that the average from 2000 to 2019 for this measure was 2.2%,” they wrote in a note. A greater-than-3% CPI rate “is still consistent with the FOMC [Federal Open Market Committee] having more work to do on the inflation front; however, there is a compelling argument that following July’s hike, this ‘work’ may take the form of avoiding cuts.”
Read the full article here