Bond Report: Treasury yields firmer amid hawkish Fed chatter and looming CPI data


Bond yields rose as markets continued to absorb another bout of hawkish Fed commentary.

What’s happening
  • The yield on the 2-year Treasury TMUBMUSD02Y, 4.257% rose 2.1 basis points to 4.237%. Yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.569% rose 1.1 basis points to 3.550%.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.679% climbed less than 1 basis point to 3.663%.
What’s driving markets

Treasury yields were firmer in early Tuesday trade as more hawkish commentary from Federal Reserve officials continued to permeate the market.

Yields had dropped sharply at the end of last week and at the beginning of this week as investors made bets that Friday’s jobs report showing a slowing pace of wage inflation may encourage the Fed to ease its tightening of monetary policy.

However, San Francisco Fed President Mary Daly and Atlanta Fed President Raphael Bostic on Monday said they thought the central bank will have to raise interest rates above 5%, with the latter adding they may need to stay there for “a long time”, according to Bloomberg.

This challenges the market. The central bank is expected to take its Fed funds rate target to no higher than 4.9% by June 2023, according to 30-day Fed Funds futures, and will have cut rates to 4.5% by December.

Investors are pricing in a 77.2% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.50% to 4.75% after its meeting on February 1st, according to the CME FedWatch tool.

Fed Chairman Jay Powell is due on Tuesday at 9 a.m. Eastern to give a speech in Sweden on central bank independence, though traders will be keeping an eye out for any references to current monetary policy strategy.

There is little U.S. economic data due on Tuesday, with wholesale inventories at 10 a.m. Eastern. Of greater significance is the December consumer price index that will be published on Thursday, and which may impact the Fed’s thinking ahead of its February policy meeting.

What are analysts saying

“Ahead of three days of treasury auctions starting with today’s [$40 billion] auction of 3-year notes, U.S. Treasury yields dropped [Monday] a few basis points all along the curve,” said strategists at Saxo Bank.

“The two-year yield is nearing the range low since last September just below 4.15%, while the 10-year benchmark yield has another 10 basis points of range to work with into the cycle low near 3.40%. A 10-year auction is up tomorrow and 30-year T-bond auction on Thursday, with prior auctions for those maturities rather weak,” said the strategists.

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