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Bond yields fell on Tuesday as traders jostled ahead of inflation data midweek.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.838%
slipped by less than 1 basis point to 4.843%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.963%
retreated 3.3 basis points to 3.967%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
4.000%
fell 2.7 basis points to 4.005%.
What’s driving markets
Bond yields are slipping further from recent highs as traders jostle for position ahead of consumer price inflation data due Wednesday, that may seal the deal on another spot of monetary tightening by the Federal Reserve later this month.
The 10-year Treasury yield is back below 4% after news Monday of deflation in the used car market and lower household inflation expectations counteracted overall sturdy labor market reports last week.
Markets are pricing in a 95% 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.
U.K. 2-year gilt yields
TMBMKGB-02Y,
flirted with 15-year highs around the 5.4% mark, after data showed annual growth in employees’ average total pay, which includes bonuses, was 6.9% in the three months to May.
Bank of England Governor Andrew Bailey has said such wage growth is driving inflationary pressures and he is expected by the market to raise interest rates from their current 5% to a cycle peak of 6.5% in coming months.
What are analysts saying
“Our own forecast for CPI on Wednesday matches the consensus, as we expect 0.3% m/m gains in both headline and CPI, with a contraction in used car prices contributing to a softening in core goods prices,” said Brian Daingerfield and the strategy team at NatWest Markets.
“The market [on Monday] largely shrugged off another chorus of hawkish Fed speak, a clear signal that ongoing Fed hawkishness is already built into expectations at this point,” NatWest added.
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