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Bond yields fell on Tuesday after data showed China’s economic recovery was not as strong as expected and traders waited for talks on the U.S. government debt ceiling later in the day.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
3.983%
slipped 2.9 basis points to 3.975%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.473%
retreated 4.2 basis points to 3.464%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.827%
fell 3.3 basis points to 3.811%.
What’s driving markets
Government bond yields in Asia, Europe and the U.S. moved lower after data from China released Tuesday showed the world’s second biggest economy was not rebounding from its COVID slowdown as strongly as hoped.
China’s industrial production rose 5.6% in April from a year earlier, below forecasts of a 10.6% rise. Retail sales grew 18.4% year on year, also missing expectations. The high growth rates reflect a contrast with lockdowns last year in Shanghai, the country’s largest city.
Japanese
TMBMKJP-10Y,
and German
TMBMKDE-10Y,
10-year bond yields tracked U.S. peers, slipping 1.2 basis points to 0.396% and off 3.4 basis points to 2.277%, respectively on concerns a cooler Chinese rebound will restrict global growth. Industrial commodities like oil
CL.1,
and copper
HG00,
were also lower on concerns about Chinese demand.
Meanwhile, traders continued to jostle for position ahead of more debt-ceiling talks, due to start at 3 p.m. Tuesday, according to the White House. Investors are struggling to gauge the likelihood of a technical default by the U.S. government and what impact it may have on the debt markets and central bank policy.
Markets are pricing in an 82.2% probability that the Fed will leave interest rates unchanged at a range of 5.0% to 5.25% after its meeting on June 14, according to the CME FedWatch tool.
The central bank is expected to take its Fed funds rate target back down to 4.5% by December, according to 30-day Fed Funds futures.
Other U.S. economic updates set for release include industrial production and capacity utilization for April at 9:15 a.m. followed at 10 a.am. by March business inventories and May home builder confidence.
There’s also a flurry of Fed officials speaking, including Cleveland Fed President Mester at 8:15 a.m.; Richmond Fed President Barkin at 10:30 a.m.; New York Fed President Williams at 12:15 a.m.; and Atlanta Fed President Bostic and Chicago Fed President Goolsbee on a panel starting at 7 p.m..
What are analysts saying
“We’ll have to see how today pans out, but it’s clear that investors are still nervous about the [debt ceiling] issue, since the yield on 1-month T-bills rose a further +11.2bps yesterday, taking them up to a new cycle high of 5.531%. That’s a big kink at the front of the yield curve centred around the 1-month mark, which is when fears of a potential default are at their highest,” wrote Jim Reid, strategist at Deutsche Bank in a morning commentary note.
“Given an early-June x-date to avoid default, the key players might only have just over a couple of weeks to reach some sort of deal. Remember as well that as it stands, President Biden is going to set off tomorrow for several meetings over the week ahead, including the G7 leaders’ summit in Japan on May 19-21 and the Quad summit in Australia on May 24. So if the deadline does arrive on the early side of estimates, then there really isn’t that long left when all the key people will be in Washington,” Reid added.
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