Monday, February 6, 2023
HomeMarketTreasuries hold their ground as traders await crucial inflation data

Treasuries hold their ground as traders await crucial inflation data

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Bond yields were little changed Tuesday ahead of crucial inflation data.

What’s happening
  • The yield on the 2-year Treasury
    slipped by less than 1 basis point to 4.386%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    retreated less than 1 basis point to 3.608%.

  • The yield on the 30-year Treasury
    fell 2.1 basis points to 3.554%.

What’s driving markets

Bond investors were waiting for the U.S. consumer price index report for November, due for release at 8:30 a.m. Eastern.

Economists forecast that year-on-year CPI growth, which peaked at a four-decade high of 9.1% in June, will slip from 7.7% in October to 7.3% last month.

Ten-year Treasury yields, which are sensitive to inflation projections, have fallen about 60 basis points since hitting a cycle high around 4.23% in October, on hopes price pressures will continue to ease and this also will allow the Federal Reserve to slow its pace of interest rate increases.

Markets are pricing in a 72.3% probability that the Fed will raise interest rates by another 50 basis points to a range of 4.25% to 4.50% after its meeting on Wednesday, according to the CME FedWatch tool. The Fed’s previous four rate rises have been 75 basis points each.

The central bank is expected to take its Fed funds rate target to 4.98% by June 2023, according to 30-day Fed Funds futures.

Benchmark bund yields
climbed less than 1 basis point to 1.944% after a report showed German inflation slipping in November from a 70-year high. It remains at 10%, however, and so the European Central Bank is forecast to raise interest rates by 50 basis points to 2.5% after its meeting on Thursday.

In the U.K., the 10-year gilt yield
rose 5.6 basis points to 3.256% following data showing unemployment rose in November but pay growth was accelerating. The Bank of England is also expected to raise interest rates by 50 basis points, to 3.50%, on Thursday.

What are analysts saying

“On a miss in either direction we think the normally volatile CPI day will be even more so as it falls one day ahead of the Fed: a miss in either direction may get the markets to assume a follow-up reaction from the Fed and Powell on Wednesday, and cause an even larger move than ‘normal’,” said Jan Nevruzi, U.S. rates strategist at NatWest Markets.

“We see a stronger than expected core print of 0.4% vs. 0.3% consensus, and such a result should have Powell lean hawkishly in Wednesday’s press conference. Of course that said, we thought he would have been more hawkish at his last appearance, but was more neutral in his speech and interview, so there is risk he repeats that ‘not more hawkish’ performance.”

“However, in addition to easing of financial conditions, we think it will be hard for Powell to brush aside both the stronger wage data in the last employment report in addition to a stronger CPI, if that indeed does come to pass, and will continue to express our tactical shorts out the curve into the main events this week,” Nevruzi concluded.


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