U.S. Treasury prices weakened Tuesday, sending yields significantly higher, as traders weighed earlier comments by Federal Reserve officials and awaited a key inflation reading due later this week.
The rise in yields was tempered by an auction of 3-year Treasury notes that met strong demand, analysts said.
- The yield on the 2-year Treasury note TMUBMUSD02Y,
4.261%rose 6.1 basis points to 4.258% at 3 p.m. Eastern, according to Dow Jones Market Data. Yields and debt prices move opposite each other.
- The yield on the 10-year Treasury note TMUBMUSD10Y,
3.620%rose 10.2 basis points to 3.618%.
- The yield on the 30-year Treasury bond TMUBMUSD30Y,
3.754%climbed 10.4 basis points to 3.754%.
What’s driving markets
Treasury yields were lifted, with traders citing remarks by Fed officials a day earlier affirming a commitment to significantly raising rates in 2023. The Fed raised its fed-funds rate last year from near zero to a range of 4% to 4.25%, sending bond yields soaring.
Yields had dropped sharply at the end of last week and at the beginning of this week as investors made bets that Friday’s U.S. December jobs report showing a slowing pace of wage inflation may encourage the Fed to ease its tightening of monetary policy. Yields ended Monday at their lowest since mid-December.
However, San Francisco Fed President Mary Daly and Atlanta Fed President Raphael Bostic said Monday they thought the central bank will have to raise the central bank’s policy interest rate above 5%, with the latter adding they may need to stay there for “a long time.”
On Tuesday, eagerly awaited remarks by Fed Chairman Jerome Powell during a panel discussion hosted by Sweden’s central bank in Stockholm offered traders little in the way of fodder. Powell’s remarks focused largely on central-bank independence and the institution’s “narrow” role in climate policy.
See: The Fed is not a ‘climate policy maker,’ Powell says
Market participants, meanwhile, think the central bank is expected to take its fed-funds rate target to no higher than 4.9% by June 2023, according to 30-day fed funds futures, and will have cut rates to 4.5% by December.
Investors are pricing in a 78.2% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.50% to 4.75% at its Feb. 1 meeting, according to the CME FedWatch tool.
The Treasury Department auctioned $40 billion of 3-year Treasury notes. The sale stopped short at 3.977%, 2.5 basis points below the when-issued yield of 4.002% seen just ahead of the auction. Other statistics were strong, with bids
That made the sale “the most aggressively bid 3-year auction since November 2009,” said Thomas Simons, money-market economist at Jefferies, in a note.
Overall statistics generated by the sale were very strong, he said. “The market needed to put in a sizable concession from where it was trading earlier in the week to compensate for risk surrounding the release of the CPI data on Thursday, and clearly getting the [when-issued yield] up to 4.002% was sufficient,” Simons wrote.
Investors were awaiting the December consumer-price index that will be published on Thursday, and which may impact the Fed’s thinking ahead of its February policy meeting.
What are analysts saying
“With a key rate in the 4.75-5.25% range now priced in and a total of 50bp (basis points) of rate cuts in the second half of 2023, the risk is tilted more to the upside,” wrote economists at UniCredit Bank, in a note. “The most recent comments by San Francisco Fed President Mary Daly and Atlanta Fed President Raphael Bostic point to a key rate a little above 5% and leave no doubt that FOMC members are currently not thinking about rate cuts in 2023.”