The benchmark U.S. bond yield was approaching 4% again on Monday as worries linger over stubborn inflation.
- The yield on the 2-year Treasury TMUBMUSD02Y,
4.836%added less than 1 basis point to 4.853%. Yields move in the opposite direction to prices.
- The yield on the 10-year Treasury TMUBMUSD10Y,
3.954%rose 1.2 basis points to 3.965%.
- The yield on the 30-year Treasury TMUBMUSD30Y,
3.939%advanced 1 basis point to 3.941%.
What’s driving markets
Bond investors remain rattled by signs U.S. inflation is not coming down as quick as hoped.
The PCE index, released on Friday, showed annual inflation increasing to 5.4% in January, from 5.3% in December. PCE inflation had declined in all the previous six months after hitting a 40-year high of 7% last June.
Stubborn inflation is reducing the chances the Federal Reserve will stop raising interest rates anytime soon, and this has been pushing up Treasury yields. The policy-sensitive 2-year yield is near its highest level since 2007 and the benchmark 10-year yield is once again flirting with 4%, leaving it only 10 basis points or so off its highest in 15-years.
Markets are pricing in a 74% 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 22nd, according to the CME FedWatch tool. The chances of a 50 basis point hike are priced at 26%, up from 18% a week ago.
The central bank is expected to take its Fed funds rate target to a cycle peak of 5.42% by September 2023, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Monday include January durable goods orders at 8:30 a.m. Eastern and January pending home sales at 10 a.m. Eastern. Fed Governor Phillip Jefferson is due to speak at 10:30 a.m.
What are analysts saying
“On Friday, U.S. terminal closed at 5.4%, catching up to Deutsche Bank’s street leading 5.6% forecast. Clearly this has been bubbling up since payrolls (Feb 3), the CPI revisions (Feb 10), CPI beat (Feb 14), retail sales beat (Feb 15),” wrote Jim Reid, strategist at Deutsche Bank, in a morning note.
“For core U.S. PCE, the 3m, 6m and 12m annualized numbers are now 4.8%, 5.1% and 4.7% and thus strongly hint at inflation stickiness. With this data it’s tough to rule out a return to 50bps hikes even if that’s not yet the base case. While that uncertainty is there, markets will stay on edge,” Reid added.