U.S. bond yields rose early Tuesday as traders eyed a raft of important economic data in coming days.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
rose by 5.4 basis points to 4.308%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
rose 6.8 basis points to 3.949%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
added 5.8 basis points to 4.094%.
What’s driving markets
Benchmark bond yields rose as investors discounted competing catalysts and looked ahead to some likely market-moving data this week.
Possibly pushing up yields was a 2.5% jump in the price of crude oil
CL.1,
amid increased Middle East tensions as Iran said it would send a warship to the Red Sea after the U.S. navy sank boats of the Tehran-backed Houthi militia, according to Reuters.
However, counteracting such inflationary pressures was news over the weekend that activity during December in China’s manufacturing sector was its slowest in six months. This report was somewhat contradicted by a private survey released Tuesday which showed a slight improvement for the sector.
U.S. economic updates set for release on Tuesday include the S&P manufacturing purchasing managers’ index for December, due at 9:45 a.m. Eastern, and November construction spending at 10 a.m.
And there will be a raft of labor data in coming sessions that are likely to determine the path for yields in the short term as investors judge whether they support or counter the narrative of interest rate cuts by the Federal Reserve.
The JOLTS job opening report is due Wednesday, the ADP private sector jobs report for December and the weekly initial jobless claims numbers will be published on Thursday, while on Friday comes the nonfarm payrolls data for December.
Ahead of all that, markets are pricing in an 89.1% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on January 31st, according to the CME FedWatch tool.
The chances of at least a 25 basis point rate cut at the subsequent meeting in March is priced at 82.2%.
Indeed, the central bank is expected to take its Fed funds rate target back down to around 3.90 by December 2024, according to 30-day Fed Funds futures.
What are analysts saying
“Outside of year-end dynamics and sparsely covered Wall Street trading desks, there remains an increasing belief that Fed rate cuts, which have bullishly marked all capital market trends in the last eight weeks, are still fully ingrained in…market sentiment,” said Stephen Innes, managing partner at SPI Asset Management
“While a stronger-than-expected U.S. jobs report could shake this conviction, a reversal would require a resurgence in realized inflation, triggering a significantly more assertive hawkish stance from Chair Powell and other key figures to discourage March or May rate cuts bets. The critical question for market participants is how the gap between market-based rate cut expectations and the Fed’s projections will be reconciled,” Innes added.
