Bond yields fell on Wednesday, clipping recent gains triggered by worries inflation is not slowing enough to prevent the Federal Reserve from continuing to increase borrowing costs.
What’s happening
- The yield on the 2-year Treasury TMUBMUSD02Y,
4.626% slipped by 3.3 basis points to 4.610%. Yields move in the opposite direction to prices. - The yield on the 10-year Treasury TMUBMUSD10Y,
3.751% retreated 1.5 basis points to 3.738%. - The yield on the 30-year Treasury TMUBMUSD30Y,
3.784% fell 1 basis point to 3.772%.
What’s driving markets
Treasury yields are paring a portion of the previous sessions gains that were sparked by signs U.S. inflation remains stubbornly high.
News on Tuesday that consumer prices still increased by 6.4% over the year to January, helped push the monetary-policy-sensitive 2-year U.S. government bond yield back above 4.6% for the first time since November, as investors bet the Federal Reserve will have to keep raising interest rates.
Markets are pricing in a 88% probability that the Fed will hike rates by another 25 basis points to a range of 4.75% to 5.0% after its meeting on March 22nd, according to the CME FedWatch tool.
The central bank is expected to take its Fed funds rate target to 5.25% by August 2023, according to 30-day Fed Funds futures. Just a few weeks ago traders were betting the peak rate would be 4.9% in June.
Another important U.S. economic update that may color the Fed’s thinking will come at 8:30 a.m. on Wednesday, when the January retail sales report is published. Economists are forecasting growth of 1.9% compared a fall of 1.1% in December.
Other data includes the February Empire State manufacturing index at 8:30 a.m., Industrial production for January at 9:15 a.m. and the NAHB home builders’ index for February at 10 a.m.. All times Eastern.
News from the U.K. also showed price pressures moderating but remaining at high levels. The yield on 10-year gilts fell 10 basis points to 3.419% after data showed inflation in Britain falling to a five month low – though at 10.1% it is still five times the Bank of England’s target.
What are analysts saying
“After yesterday’s U.S. inflation numbers DB [Deutsche Bank] have increased our U.S. terminal rate forecast from 5.1% to 5.6% with two extra 25bps hikes in June and July. From what I can see we are the highest on the street again as we have been for most of the last year,” wrote Jim Reid, strategist at Deutsche Bank.
“To be fair, yesterday was the straw that broke the camel’s back as the risks have been on the upside for a while. However, since the February FOMC meeting our economists have learned three key lessons. First, the labour market is so far proving remarkably resilient to Fed tightening. Second, the CPI data revisions and yesterday’s CPI print means that less progress has been made towards disinflation. And third, financial conditions have failed to tighten enough for the Fed to have confidence that these first two trends will improve meaningfully in the coming months,” Reid added.
