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Bond yields rose on Friday, leaving benchmarks near their highest since March, ahead of crucial inflation data.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.908%
added 5.1 basis points to 4.916%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.877%
rose 3.2 basis points to 3.878%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.919%
climbed 1.7 basis points to 3.920%.
What’s driving markets
Investors will be keeping an eye out for the U.S. personal consumption expenditure report for May, which will be published at 8:30 a.m. Eastern, with economists forecasting annual core growth of 4.6%, down from 4.7% in April.
The PCE is among the Federal Reserve’s favored inflation gauges and so bond investors will want to see confirmation that price pressures continue to ease, allowing the central bank to soon stop its monetary tightening campaign.
However, benchmark bond yields sit at their highest in more than three months after a string of data suggesting the U.S. economy so far has managed to absorb the Fed’s 500 basis point hike in borrowing costs since March 2022 without incurring too much damage.
Currently, markets are pricing in an 89% probability that the Fed will raise interest rates by 25 basis points to a range of 5.25% to 5.50% after its meeting on July 26, according to the CME FedWatch tool.
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.
Other U.S. economic updates set for release on Friday include personal income and spending for May, at 8:30 a.m., the Chicago Business Barometer for June at 9:45 a.m. and the final reading of June consumer sentiment at 10 a.m.
Meanwhile, German 2-year bond yields
TMBMKDE-02Y,
moved off session lows to be little changed at 3.220% after a report from Eurostat showed eurozone annual headline inflation eased from 6.1% in May to 5.5% in June, but the core reading, which strips out volatile items like energy and food, re-accelerated from 5.3% to 5.4%.
What are analysts saying
Jim Reid, strategist at Deutsche Bank, noted how better-than-expected economic reports on Thursday — including lower jobless claims and an upward revision to first quarter GDP — sent Treasury yields to their highest levels since the collapse of Silicon Valley Bank.
“All this positive data played into the recent market narrative, which is that strong growth and sticky inflation will see central banks hold rates at restrictive levels for much longer than previously expected,” Reid wrote in a morning note.
“In fact, if you look at market pricing for deep into 2024, it was clear how investors were adjusting to a much more prolonged period of high rates. For instance, expectations for the Fed’s policy rate by December 2024 moved back above 4% again…Now admittedly, that’s still beneath the 4.6% level in the Fed’s latest dot plot, but it shows how markets are increasingly coming round to the Fed’s view of the world,” Reid added.
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