Treasury yields dip after surge higher following strong data and hawkish Fedspeak

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Bond yields dipped slightly early Tuesday having risen sharply in recent sessions as rate-cut expectations were pared.

What’s happening

  • The yield on the 2-year Treasury
    dipped by 2.9 basis points to 4.445%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    fell 2.2 basis points to 4.140%.

  • The yield on the 30-year Treasury
    retreated less than 1 basis point to 4.333%.

What’s driving markets

Ten-year Treasury yields, the global rate benchmark, sit near the top of a two-month range after stronger-than-expected U.S economic data reinforced the Federal Reserve’s pushback on the timing of interest rate cuts.

Much of the yield bounce has occurred in the last two sessions following Friday’s bumper jobs report and Monday’s ISM services update that contained a significant jump in the prices paid component. In between those, on Sunday, Fed Chair Jerome Powell implied it was unlikely the central bank would not trim borrowing costs after its next meeting in March.

“So, there was plenty of fresh momentum behind the selloff [in bond prices],” said Jim Reid, strategist at Deutsche Bank.

“Indeed, since the jobs report on Friday, the 10-year Treasury yield has risen by 27.8 basis points, which is the biggest 2-day jump since June 2022, back when the Fed suddenly geared up to hike by 75bps for the first time since the 1990s. So we shouldn’t underestimate the moves or the volatility,” Reid added.

There are no top drawer economic data scheduled for Tuesday but there will be a number of Fed officials making comments. These include Cleveland Fed President Loretta Mester speaking at noon Eastern, Minneapolis Fed President Neel Kashkari talking at 1 p.m., Boston Fed President Susan Collins speaking at 2 p.m., and Philadelphia Fed President Patrick Harker talking at 7 p.m.

Ahead of that, markets are pricing in a 83.5% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on March 20th, according to the CME FedWatch tool. Just a month ago the chances of at least a 25 basis point cut was priced at 68.1%.

The probability of at least a 25 basis point rate cut by the subsequent meeting in May is priced at 61.9%.

The central bank is still expected to take its Fed funds rate target back down to around 4.25% by December 2024, according to 30-day Fed Funds futures.

The Treasury will auction $54 billion of 3-year notes at 1 p.m.

What are analysts saying

“Could the recent outsize strength of the U.S. economy — visible in the 4.1% GDP growth pace in 2023H2 and the 353k January nonfarm payroll gain — derail continued progress on disinflation? We don’t think so,” said Jan Hatzius, economist at Goldman Sachs in a note published Monday.

“A broader set of indicators suggest that output is at most growing modestly above trend, the labor market is back in balance, and wage growth continues to trend down toward a sustainable rate. Combined with our expectation that year-over-year core PCE inflation will fall to 2.2% in Q2, we continue to expect five Fed cuts this year, most likely beginning in May,” Hatzius added.


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