Bond Report: Treasury yields edge higher amid concerns about stubborn inflationary pressures


Six-month through 30-year Treasury yields rose Tuesday morning as revived inflation angst trumped concerns about a slowing global economy.

What’s happening

  • The yield on the 2-year Treasury BX:TMUBMUSD02Y rose 5.8 basis points to 4.924% from 4.866% on Friday.
  • The yield on the 10-year Treasury BX:TMUBMUSD10Y climbed 7.6 basis points to 4.249% from 4.173% Friday afternoon.
  • The yield on the 30-year Treasury BX:TMUBMUSD30Y rose 8.8 basis points to 4.373% from 4.285% on Friday.
  • U.S. financial markets were closed on Monday for the Labor Day holiday.

What’s driving markets

U.S. investors returned from the Labor Day holiday weekend facing news that China’s service sector activity grew at its slowest pace in eight months in August, and a gauge of business activity in the eurozone hit its lowest since November 2020.

The batch of weak economic data from China and Europe was shrugged off by fixed-income traders, with bond yields moving higher as inflation concerns held sway. Investors focused on last Friday’s nonfarm payrolls report that showed the U.S. labor market still in good health, and comments from Cleveland Federal Reserve President Loretta Mester, who said inflation remains too high.

Brent crude futures BRN00, +0.91% jumped above $90 a barrel after Saudi Arabia and Russia extended crude-supply cuts. Higher oil prices are adding to anxiety that inflationary pressures will be revived and force the Fed to keep interest rates higher for longer.

In an interview with CNBC Tuesday, Federal Reserve Gov. Christopher Waller said policy makers can afford to “proceed carefully” with interest-rate increases.

Markets are pricing in a 95% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% at the subsequent meeting in November is priced at 38.6%.

In U.S. economic updates on Tuesday, factory orders fell by 2.1% for July versus expectations for a 2.3% decline.

What analysts are saying

“The recent run-up in oil prices is already setting us up for some hotter August CPI prints, so any further gains there are going to be a fresh hurdle for central banks in their quest to get inflation back to target,” said strategist Jim Reid and others at Deutsche Bank.

“That concern was evident among sovereign bonds, which sold off mainly thanks to higher inflation expectations,” they said.

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