Bond yields nudged higher early Tuesday as traders absorbed the latest comments from Fed officials and eyed a crucial inflation report later in the week.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
was barely changed at by 4.379%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
rose less than 1 basis point to 4.041%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
rose by 1.3 basis points to 4.207%.
What’s driving markets
Ten-year Treasury yields were above 4% and trading near their highest levels in a month after the market reined back expectations for Federal Reserve interest rate cuts this year following stronger-than-expected jobs data published last Friday.
Fed officials continued to hedge their forecasts on the likely trajectory for the central bank’s policy.
Fed Governor Michelle Bowman late Monday said: “Should inflation continue to fall closer to our 2% goal over time, it will eventually become appropriate to begin the process of lowering our policy rate to prevent policy from becoming overly restrictive.”
However, Bowman also said there was a risk that the recent easing in financial conditions may deliver a reacceleration of growth that may cause inflation to reaccelerate.
Still, the central bank will welcome a survey released Monday by the New York Fed, which showed households one-year inflation expectations were at their lowest since January 2021.
With that in mind, traders were eying the December reading on U.S. consumer price inflation which will be published on Thursday, followed the next day by producer prices data.
U.S. economic updates set for release on Tuesday include the trade deficit for November at 8:30 a.m. Eastern. The Fed’s Vice Chair for Supervision Michael Barr will take part in a discussion at noon.
Markets are pricing in a 95.3% 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 60%, down from 79% a week ago.
The Treasury will auction $52 billion of 3-year notes at 1 p.m.
What are analysts saying
“[T]he expectation of a sufficiently soft CPI report from the U.S. this Thursday, and the persistent fall in crude oil prices continue to soothe investors nerves regarding the future of inflation despite the exploding shipping costs due to the Red Sea tensions,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
