Bond Report: Bond yields see meager moves as inflation fears linger


U.S. bond yields fluctuated on Thursday, unable to decisively reverse much of the previous session’s spike caused by revived inflation concerns.

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Moves in Treasury debt were relatively meager, with yields little changed, as investors continue to parse the latest clues to the Federal Reserve’s policy path and signs of stubborn inflation across the global economy.

U.S. data due for release on Thursday include the weekly initial unemployment claims at 8.30 a.m. Eastern and existing home sales at 10 a.m. Eastern.

Yields moved higher on Wednesday after data showed the pace of price rises in the U.K. TMBMKGB-10Y, 2.295% breached 10% for the first time in more than 40 years, raising fears that many economies are yet to register peak inflation.

And later the minutes of the Federal Reserve’s July policy meeting showed that though the central bank was wary of overtightening policy, it was nevertheless in no mood to stop raising interest rates as it seeks to damp inflation running just shy of 40-year highs.

“We saw the potential for July FOMC minutes to sound hawkish relative to the dovish interpretation of the meeting itself. Instead, minutes were fairly neutral and, in any case, front-end interest rates had repriced more hawkish policy subsequent to the meeting,” said Andrew Hollenhorst, U.S. economist at Citi.

Read: Did the stock market ‘misinterpret’ Fed again? What strategists say about the reaction to the July minutes

Alex Pelle, U.S. economist at Mizuho Securities in a note to clients, wrote: “The Fed is aiming to thread the needle between not-too-hot and not-too-cold in their quest to bring inflation back to down to target from one of the highest levels in the postwar period.”

“The two negative GDP prints [for the first and second quarters of 2022] led to a greater consideration of downside risks, but the data since the meeting has been more constructive on the growth front. On net, this suggests a somewhat more gradual but longer-lasting tightening cycle than currently discounted,” Pelle added.

Other analysts argued the Fed will have to be more hawkish to achieve its aims of pushing inflation quickly back to its 2% target and markets are too optimistic about when the central bank may be able to ease off the brake pedal next year.

“The FOMC needs to push policy into restrictive territory…I believe that the Fed will need to take rates well above 4% before stopping because inflation will prove harder to arrest than officials currently hope,” Stephen Stanley, chief economist at Amherst Pierpont, told clients in a note.

“In any case, the Fed and the fixed-income markets are more or less on the same page through about the end of 2022 but then have wildly different views of how 2023 will play out. It looks like the markets are starting to inch in the Fed’s direction this week based on fed funds futures for next year, but the gap remains wide,” Stanley added.

Markets are pricing in a 61.5% probability that the Fed will raise interest rates by another 50 basis points to a range of 2.75% to 3.00% after its meeting on September 21st. The central bank is expected to take its borrowing costs to 3.7% by April 2023, according to Fed Funds futures.

The Treasury will hold an auction at 1 p.m. Eastern, offering $8 billion of 30-year TIPS.

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