Bond Report: Treasury yields rise ahead of reading on Fed’s favorite inflation gauge

Treasury yields rose Friday, with the yield curve undoing some of this week’s substantial flattening, ahead of a reading on U.S. September personal income and spending that includes the Federal Reserve’s favored inflation gauge.

What are yields doing?
  • The yield on the 10-year Treasury note

    rose to 1.609%, compared with 1.568% at 3 p.m. Eastern on Thursday.

  • The 2-year Treasury note yield

    rose to 0.521%, compared with 0.499% Thursday afternoon. Through Thursday, the 2-year yield had risen 21 basis points in October, on track for its largest monthly rise since April 2018, according to Dow Jones Market Data.

  • The 30-year Treasury bond yield

    was up 5.1 basis points at 2.01%.

What’s driving the market?

Analysts were looking for end-of-month position squaring on Friday, as investors also await next week’s Federal Reserve policy meeting, which is widely expected to see policy makers unveil plans to begin scaling back monthly bond purchases.

Yield curves, which plot yields across maturities in government bonds, have flattened significantly around the world. Rising yields at the short end of the curve have been tied by analysts to expectations central banks will be more aggressive than previously expected to address inflationary pressures.

Read: Bond market yield curve flattening continues as U.S. growth slows, while ECB’s Lagarde pushes back on rate-hike expectations

Meanwhile, a fall for yields at the long end of the curve earlier this week is seen by some market watchers as a sign investors are worried about long-term economic growth prospects. Others see a more benign interpretation as U.S. stock indexes continue to march to records, arguing that the yield moves indicate investors don’t think it will take much for central banks to tame near-term inflation pressures.

See: Stocks rise to records as markets seem ‘pretty convinced’ it won’t take much to tame inflation

U.S. September personal income and spending data is due at 8:30 a.m. Eastern. Economists expect income to show a 0.4% fall, while spending is forecast to rise 0.6%. The core personal-consumption expenditures price index, the Fed’s favored inflation gauge, is expected to show a monthly rise of 0.2%.

What are analysts saying?

“We see the risks [around the PCE inflation data] as being to the higher side, at least in terms of headline prices if not core prices as well,” said Steve Barrow, head of G-10 strategy at Standard Bank, in a note. “While the data could increase some of the angst in the market and possibly add to the upside pressure in front-end yields, we doubt a significant response so close to the FOMC meeting next week.”

“The bond market is feeling the blues lately, ringing alarm bells about a slowdown in economic growth as central banks overreact to this inflation scare. The yield on the 30-year U.S. Treasury note has fallen below the 20-year one, signaling that the powerful policy tightening being priced in for the next few years will ultimately backfire and hamstring both growth and inflation,” said Marios Hadjikyriacos, investment analyst at XM, in a note.

This post was originally published on Market Watch

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