Bond Report: U.S. Treasury yields hold near six-week highs as inflation data looms


Bond yields were steady Monday as investors show caution ahead of inflation data.

What’s happening
  • The yield on the 2-year Treasury TMUBMUSD02Y, 4.532% added 2 basis points to 4.531%. Yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.733% dipped less that 1 basis point to 3.733%.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.799% fell 1.9 basis points to 3.803%.
What’s driving markets

Benchmark bond yields are barely changed as traders hold their fire after a sharp jump last week and ahead of some crucial economic data.

“Market sentiment remains on the defensive ahead of CPI data from the U.S. tomorrow and after recent CPI readings were revised higher. U.S. 2-year treasury yields have surged to their highest since November ahead of that data point and retail sales on Wednesday as the market has adjusted Fed expectations for the peak Fed funds rate higher,” said strategists at Saxo Bank.

Markets are pricing in a 91% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5.0% after its meeting on February 1st, according to the CME FedWatch tool.

The central bank is expected to take its Fed funds rate target to a peak of 5.2% by August 2023, according to 30-day Fed Funds futures. Just a few weeks ago that terminal rate was around 4.9%.

U.S. economic updates, with just the New York Fed 1-year and 5-year inflation expectations survey due for release at 11 a.m. Eastern.

What are analysts saying

Jan Nevruzi, U.S. rates strategist at NatWest Markets, pointed out that Fed chair Jay Powell will deliver his semiannual monetary policy testimony on March 7 in front of the Senate Banking Committee, “which we think is likely to be the final message the Fed will deliver to markets ahead of their blackout period starting March 11”.

“[T]he CPI next week will act as the key barometer for what the tone of that message can be and whether the March SEP forecasts need further upward revisions. We have pointed out in our previous commentary, but in our view a robust labor market in itself (without much spillover into inflation) isn’t enough to continuously keep increasing the terminal rate, but rather a plateau in the decrease of inflation will be required for the Fed to tighten further,” he added.

“For now, we still think the Fed maintains a policy path of two more 25bp hikes over the next two meetings, after which they remain on hold for the remainder of the year. Notably, Powell’s March 7th appearance will come before the Feb NFP, released on the 10th of March,” Nevruzi concluded.

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