Bond yields nudged higher early Tuesday, amid steadier trading than of late with market moving catalysts thin on the ground.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
added 3 basis points to 4.411%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
rose 2.6 basis points to 4.132%. -
The yield on the 30-year Treasury
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climbed by 2.9 basis points to 4.351%.
What’s driving markets
The benchmark 10-year Treasury yield seems to have stabilized somewhat around the 4.1% level as traders wait for fresh news that may challenge the current consensus on the economy’s trajectory and Federal Reserve policy.
There has so far been little in the way of top drawer economic data this week, and the highlight on Tuesday is just the Richmond Fed index for January, due at 10 a.m. Eastern.
“The muted moves came in the absence of any obvious catalysts, and we won’t hear from Fed officials now until after next week’s decision,” said Jim Reid, strategist at Deutsche Bank.
Markets are pricing in a 97.4% 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 by the subsequent meeting in March is priced at 43.5%, down from 88% a month ago. The central bank is expected to take its Fed funds rate target back down to around 4.11% by December 2024, according to 30-day Fed Funds futures.
The U.S. Treasury will auction $60 billion of 2-year notes at 1 p.m.
The Bank of Japan left policy unchanged Tuesday, keeping its short-term rate at minus 0.1% and maintaining its yield curve control parameters. Japan’s government bond yields
BX:TMBMKJP-10Y
initially rose after comments by Governor Kazuo Ueda were seen laying the groundwork for a tightening of monetary policy fairly soon.
What are analysts saying
Alex Pelle, U.S. economist at Mizuho, noted that bond markets will face potentially impactful data later in the week, particularly the fourth quarter U.S. GDP report, published Thursday.
“We expect this report to reinforce the notion that nominal GDP growth is stabilizing at a pace distinctly above what the U.S. economy produced in the 2010s. That is a potentially fragile basis for continued disinflation,” said Pelle.
“We will also be watching initial claims on Thursday. We have signs of a re-tightening of the labor market coming from claims and other layoff data. Such a development would certainly be in line with the drastic easing in financial conditions over the last 2.5 months, so this possibility bears
watching,” Pelle added.
Then Friday brings the PCE inflation gauge, the Fed’s favored measure of price pressures.
