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Bond Yields Fall Ahead of Inflation Data


Bond yields saw a dip on Tuesday as traders prepared for the release of midweek inflation data.

Changes in Yield

  • The yield on the 2-year Treasury TMUBMUSD02Y, 4.838% slipped by less than 1 basis point to 4.843%. It is important to note that yields move in the opposite direction of prices.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.967% saw a retreat of 3.3 basis points to 3.967%.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 4.005% dropped by 2.7 basis points to 4.005%.

Market Drivers

Bond yields continue to slip as traders position themselves ahead of the release of consumer price inflation data on Wednesday. This data may play a crucial role in determining whether the Federal Reserve will implement further monetary tightening later this month.

The retreat in the 10-year Treasury yield below 4% was prompted by news on Monday about deflation in the used car market and lower household inflation expectations. This counters the overall strong labor market reports from last week.

Market indicators currently show a 95% probability of a 25 basis point interest rate hike by the Federal Reserve, which would bring the range to 5.25% to 5.50%, after the July 26th meeting, according to the CME FedWatch tool.

Central Bank’s Fed Funds Rate Target

The central bank is not expected to take its Fed funds rate target back down to around 5% until May 2024, according to 30-day Fed Funds futures.

U.K. 2-Year Gilt Yields Reach 15-Year Highs

U.K. 2-year gilt yields flirted with 15-year highs around the 5.4% mark. This surge came after data revealed a significant annual growth in employees’ average total pay, which includes bonuses, reaching 6.9% in the three months leading up to May.

Bank of England’s Outlook on Interest Rates

Bank of England Governor Andrew Bailey believes that wage growth is contributing to inflationary pressures. Consequently, the market expects Bailey to raise interest rates from the current 5% to a cycle peak of 6.5% in the coming months.

Analyst Predictions for CPI

“Our own forecast for CPI on Wednesday matches the consensus, as we expect 0.3% month-on-month gains in both headline and CPI. Additionally, we anticipate a contraction in used car prices, which will contribute to a softening in core goods prices,” said Brian Daingerfield and the strategy team at NatWest Markets.

Market Reaction to Hawkish Fed Speak

The market largely shrugged off another round of hawkish Fed speak on Monday, indicating that ongoing Fed hawkishness is already factored into expectations at this point, according to NatWest.

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