Treasury yields rise, 2-year highs since Dec 2018 ahead of Friday’s US inflation report

Treasury yields rose on Wednesday, pushing the 2-year rate to its highest level in more than three years ahead of Friday’s May CPI data.

What returns do
  • The 2-year treasury note TMUBMUSD02Y,
    The yield rose 3.9 basis points to 2.772% from 2.733% on Tuesday afternoon. That’s the highest level since Dec. 12, 2018, based on 3 p.m. returns, according to Dow Jones Market Data.

  • The yield on the 10-year government bond BX:TMUBMUSD10Y rose 5.9 basis points to 3.028% from 2.969% at 3pm ET on Tuesday.

  • The yield of 30-year government bonds TMUBMUSD30Y,
    rose 5.7 basis points to 3.178% from 3.121% late Tuesday.

  • The 10-year and 30-year prices are up on five of the last seven trading days.

What moves the market

The prospects for economic growth and inflation as the US Federal Reserve tightens monetary policy remain the focus of investors, with Friday’s reading of the US consumer price index likely to be the week’s biggest event for May.

Economists polled by the Wall Street Journal expect the annual rate to slip to 8.2% from 8.3% in April. That would be down from a March reading of 8.5%, but still elevated. The core, which excludes food and energy costs, is expected to decline to 5.9% year-on-year from April’s 6.2%.

However, there is a risk that the year-on-year headline inflation rate will return to where it was in March. Fixings or derivative-like instruments related to Treasury inflation-linked securities, or TIPS, suggest the CPI will come in at 8.5% year-on-year on Friday, which would match the 40-year high on March. Fixing traders also expect inflation to rise to 8.6% in June and July before hitting 8.8% in August and September. The value for October is 8%.

Read: This hedge fund manager called inflation early on. He now says consumer prices will end 2022 at levels that “scream the Fed’s failure.”

The Treasury Department’s $33 billion auction of 10-year notes on Wednesday was “weak,” according to Michael Reinking, a senior market strategist at the New York Stock Exchange.

The European Central Bank meets on Thursday, with investors expecting policymakers to lay the groundwork for ending asset purchases and raising interest rates in July.

What Analysts Say

“The Fed will hike rates by 50 basis points at next week’s meeting, signaling a similar move in July,” said Andrew Hunter, chief US economist at Capital Economics. “We still believe a fall in inflation will allow officials to ease the pace of tightening later this year, but recent strength in activity and inflation data suggests the chances of a further 50% increase basis points up in September.” Treasury yields rise, 2-year highs since Dec 2018 ahead of Friday’s US inflation report

Brian Lowry

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