Yields for the closely watched 10-year Treasury note were slipping Wednesday morning, after hitting the highest level since July of 2019 on Tuesday which stoked predictions of a rise to 2% as the Federal Reserve aims to combat inflation with several likely benchmark interest rate rises this year.
A January reading of U.S. consumer price inflation on Thursday will be pored over to assess the direction of monetary policy.
What are yields doing?
-
The 10-year Treasury note
TMUBMUSD10Y,
1.931%
yields 1.924% basis points, down from1.954% at 3 p.m. Eastern Time on Tuesday, which was the highest yield since July 31, 2019, according to Dow Jones Market Data. -
The 2-year Treasury note
TMUBMUSD02Y,
1.334%
rate sits at 1.314%, pulling back versus 1.339% a day ago. - The differential between the short-term 2-year note and the benchmark 10-year, known as the yield curve, stood at 0.61 percentage points.
-
The 30-year Treasury bond
TMUBMUSD30Y,
2.228%
rate was at 2.221%, compared with 2.250% on Tuesday afternoon.
What’s driving the market?
In addition to the U.S. consumer price index report for January on Thursday, investors are looking ahead, to a sale of $37 billion in 10-year debt at 1 p.m. Wednesday.
The refunding auction could help to gauge appetite for Treasurys against tighter monetary policy from the Fed and elevated inflation readings.
Treasury yields have been on an upward trajectory as the U.S. central bank has signaled that it will start to tighten policy, notably by possibly kicking off a series of interest-rate hikes in March. Market-based projections point to a 70% chance of a 0.25 percentage point increase and a roughly one-out-of-three likelihood of 0.50 percentage point hike next month, according to data from CME Group
CME,
using federal-funds futures.
Meanwhile, expectations are for the January CPI to show a 0.5% increase after a 0.6% rise in the prior month, with the year-over-year reading expected to show a 7.3% climb, after U.S. inflation for December hit its fastest pace in nearly four decades.
Among Fed speakers on Wednesday, Fed Gov. Michelle Bowman will speak at 10:30 a.m. ET, while Cleveland Fed President Loretta Mester is scheduled to speak at noon.
The Cleveland Fed president, who is a voting member of the Fed’s interest rate setting committee this year, said last month that the Fed will be able to let its balance sheet run down at a faster pace than it did during the past cycle.
What strategists are saying
“This afternoon’s 10-year refunding auction offers a gauge of investor demand for Treasuries on the eve of a hiking campaign. The results will also provide a litmus test for dip buying appetite; although the modest overnight bid suggests the first attempt to push 10-year yields through the 1.971% support level was met by some interest,” wrote BMO Capital Markets strategists Ian Lyngen and Ben Jeffery, in a Wednesday note.
This post was originally published on Market Watch
