Treasury yields finished mixed on Monday as investors awaited a major U.S. inflation update and a Federal Reserve policy decision over the next two days.
What happened
-
The yield on the 2-year Treasury note
TMUBMUSD02Y,
4.728%
declined 1.4 basis points to 4.590% from 4.604% on Friday. The yield is down two of the past three trading sessions, according to Dow Jones Market Data. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.765%
advanced 1.9 basis points to 3.763% from 3.744% Friday afternoon. The 10-year yield is up four of the past five trading days. -
The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.852%
rose 1.9 basis points to 3.905% from 3.886% late Friday. The 30-year yield is up five of the past seven trading sessions.
What drove markets
All attention is on a week full of potential monetary-policy catalysts.
On Tuesday, the U.S. consumer-price index for May arrives. Economists expect the annual headline CPI inflation rate to have dropped to 4% from 4.9% in April, a decline that should convince the Federal Reserve to leave interest rates unchanged on Wednesday.
Indeed, fed funds futures traders are pricing in a 76.9% probability that the Fed will stand pat at a range of 5%-5.25% on June 14, according to the CME FedWatch tool.
Traders of derivatives-like instruments known as fixings see inflation on a downward trend through early next year, and expect the annual headline CPI rate to eventually reach around 2.2% next April. Still, “it’s anyone’s guess” where inflation is headed at the moment because “we don’t know many things and there are so many risks,” said Gang Hu, an inflation trader at New York hedge fund WinShore Capital Partners. The 2.2% projection for April 2024 “is probably too optimistic,” he said via phone.
The yield on 10-year German bunds
TMBMKDE-10Y,
was up 1.3 basis points at 2.391% ahead of the European Central Bank’s expected 25-basis-point hike on Thursday.
The Bank of Japan is forecast to leave rates unchanged on Friday, and the 10-year JGB yield
TMBMKJP-10Y,
— which the central bank continues to suppress by intervention — is little changed at 0.429%.
What analysts are saying
“The focus this week will no doubt be on the decisions of the major central banks (the Fed on Wednesday, the ECB on Thursday, and the BoJ on Friday),” said Thierry Wizman, Macquarie’s global FX and interest rates strategist, in a note.
In regard to the Fed’s decision, “the market has reduced its implied probability of a hike to 25%, despite the lingering inflation expected to be seen in the ‘core’ CPI,” Wizman wrote. “We think that some calm over U.S. inflation and the Fed’s response makes sense. Yes, core CPI and PCE inflation remains ‘sticky,’ but we believe that traders have admitted a much more benign outlook for inflation in the medium term than what’s reflected in the CPI and PCE inflation measures today.”
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