Bond Report: Treasury yields rise, 2-year hits highest since Dec 2018 ahead of Friday’s U.S. inflation report


Treasury yields advanced on Wednesday, pushing the 2-year rate to its highest in more than three years ahead of May’s consumer-price index data on Friday.

What yields are doing
  • The 2-year Treasury note TMUBMUSD02Y, 2.786% yield rose 3.9 basis points to 2.772% from 2.733% Tuesday afternoon. That’s the highest level since Dec. 12, 2018, based on 3 p.m. yields, according to Dow Jones Market Data.
  • The yield on the 10-year Treasury note BX:TMUBMUSD10Y rose 5.9 basis points to 3.028% from 2.969% at 3 p.m. Eastern on Tuesday.
  • The 30-year Treasury bond yield TMUBMUSD30Y, 3.193% rose 5.7 basis points to 3.178% from 3.121% late Tuesday.
  • The 10- and 30-year rates are up five of the past seven trading days.
What’s driving the market

The outlook for economic growth and inflation as the Federal Reserve tightens monetary policy remains front and center for investors, with Friday’s reading on the U.S. May consumer-price index expected to be the main event of the week.

Economists surveyed by The Wall Street Journal expect the year-over-year rate to slip to 8.2% from 8.3% in April. That would be down from a March reading of 8.5%, but still be elevated. The core reading, which strips out food and energy costs, is seen edging down to 5.9% year-over-year versus 6.2% in April.

There’s a risk, however, that the year-over-year headline inflation rate bounces back to where it was in March. Fixings, or derivative-like instruments related to Treasury inflation-protected securities, or TIPS, imply that May’s year-over-year consumer-price index reading on Friday will come in at 8.5%, which would match the 40-year high hit in March. Fixings traders also see inflation climbing to 8.6% in June and July, before hitting 8.8% in August and September. October’s reading is seen at 8%.

Read: This hedge fund manager called inflation early. He now says consumer prices will finish 2022 at a level that `screams failure by the Fed’

The Treasury Department’s $33 billion auction of 10-year notes on Wednesday came in “weak,” according to Michael Reinking, a senior market strategist for the New York Stock Exchange.

The European Central Bank meets Thursday, with investors expecting policy makers to lay the groundwork to end asset purchases and begin lifting interest rates in July.

What analysts are saying

“The Fed is set to hike interest rates by 50bp at its meeting next week and to signal that a similar move is coming in July,” said Andrew Hunter, senior U.S. economist at Capital Economics. “We still think a drop back in inflation will allow officials to ease the pace of tightening later this year, but the recent strength of the activity and inflation data suggest the chances of another 50bp hike in September have risen.”

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