Bond yields rose on Tuesday as traders returned from the extended weekend with the trend for higher rates intact.
What’s happening
- The yield on the 2-year Treasury TMUBMUSD02Y,
4.673% rose by 4.3 basis points to 4.673%. Yields move in the opposite direction to prices. - The yield on the 10-year Treasury TMUBMUSD10Y,
3.884% climbed 5.7 basis points to 3.879%. - The yield on the 30-year Treasury TMUBMUSD30Y,
3.932% added 5 basis points to 3.921%.
What’s driving markets
Stronger-than-expected U.S. economic data of late are increasing the chances of the Federal Reserve keeping interest rates higher for longer and pushing short-term bond yields back close to cycle peaks.
The yield on the monetary-policy-sensitive 2-year Treasury note sits just a few basis points shy of its highest level since 2007, as Fed officials have continued to emphasize that more expensive borrowing costs may be needed to suppress inflation still running at more than three times the central banks 2% target.
Markets are pricing in a 79% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5.0% after its meeting on March 22, according to the CME FedWatch tool.
The central bank is expected to take its Fed funds rate target to 5.3% by August 2023, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Tuesday include the S&P flash services and manufacturing purchasing managers’ indices for February, due at 9:45 a.m. Eastern. Existing home sales figures will be published at 10 a.m.. On Wednesday the Fed will release the minutes of its early February meeting.
“A heavy schedule of auctions lies ahead this week, starting with an auction of 2-year notes today after the benchmark traded within 10 basis points of the 15-year high of 4.80% posted last November. A 5-year auction will follow tomorrow and 7-year on Thursday. The U.S. data highlight this week is Friday’s January PCE inflation data,” said strategists at Saxo Bank.
In the U.K., 10-year gilt yields jumped 7.9 basis points to 3.552% after a composite purchasing managers survey rose from 47.8 in January to 53 in February, well above forecasts.
What are analysts saying
“After a quiet Monday with the U.S. on holiday, the move towards a higher-for-longer consensus seems to be back in motion today as the hawkish drumbeat grows louder even as we approach tonight’s US PMI and existing home sales data,” said Stephen Innes, managing partner at SPI Asset Management.
“Hence traders feel compelled to hedge that hawkish sting in the tail in case the data comes in stronger than expected, as a ‘no landing’ is not an option for the Fed. While most anticipate that the Fed will continue in 25bp increments and that the bar for returning to a 50bp pace is high, it is not insurmountable. Indeed, if US economic data continues to run hot, it would likely make for a more compelling case for returning briefly to a larger incremental rate hike regime,” Innes added.
