Treasury yields mostly fell on Friday as traders digested June inflation data that may impact Federal Reserve thinking on the pace of interest rate rises.
- The yield on the 2-year Treasury TMUBMUSD02Y, 2.883% climbed by 2.3 basis points to 2.897% but has seen the largest one month yield decline since May.
- The yield on the 10-year Treasury TMUBMUSD10Y, 2.651% declined 3.8 basis points to 2.642% and saw the largest one month yield decline in July since March.
- The yield on the 30-year Treasury TMUBMUSD30Y, 3.008% fell 6.2 basis points to 2.976% and saw the largest one month yield decline since November 2021.
What’s driving markets
Longer dated Treasury yields ended lower Friday with the 10 year yield ending at the lowest since April 6 this year following weaker-than-expected U.S. economic data Thursday and perceived signs of a less hawkish tone from the Federal Reserve. Data on U.S. inflation and employment costs was largely taken in stride Friday morning.
The Fed’s preferred inflation gauge, the personal consumption index rose 1% in June led by higher fuel prices, and rose 6.8% for the year, up from 6.3% in the prior month — the highest rate since January 1982.
“Given that PCE rose 6.8% year-over-year, which was higher than the previous measure of 6.3% and is part of an ever-increasing trend, the Fed has to be concerned that inflation is becoming more entrenched and they are going to need to remain aggressive in raising interest rates,” Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance wrote in a note.
“There are a number of datapoints still to come before the Fed meets again in September in order to determine how much to raise interest rates next and we believed they will again raise rates by 0.75%, despite the fact that consensus is for 0.5%, and this will have implications for the bond and stock markets.”
The employment cost index rose 1.3% in the second quarter, down slightly from a 1.4% gain in the January-March quarter, and over the past year rose at a 5.1% rate, compared with a 4.5% rate in the first quarter.
“Overall, this latest data is not indicative of a recession, so the Fed will likely continue to raise key interest rates in September to squelch PCE inflation,” said Louis Navellier of Navellier & Associates which has about $2.5 billion under management. “Wall Street is celebrating the good earnings and the Fed’s dovish statement. I believe the Fed is going to have its last rate increase on September 21st and right now I’d say it’s going to be 50 basis points because of the decline in treasury bond yields. ”