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Bond Report: 10-year Treasury yield down for 4th session after Fed reiterates its inflation-fighting resolve

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The 10-year Treasury yield dropped to around 3.7% on Wednesday amid a wave of government bond buying after data showed French inflation unexpectedly slowed in December while U.S. data showed the manufacturing sector remained weak though the labor market was still healthy.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.349%

slipped to 4.378% from 4.403% on Tuesday.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.695%

retreated to 3.709% from 3.791% late Tuesday.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.801%

fell to 3.814% from 3.890% Tuesday afternoon.

What’s driving markets

The benchmark 10-year Treasury yield has shed roughly 12 basis points in the first two trading days of the year with investors buying government bonds on signs of slowing inflation in Europe and worries about an economic contraction.

Data released on Wednesday showed that France’s annual inflation rate unexpectedly fell in December to its lowest level in three months, driven by a moderation in energy prices. Consumer prices rose 5.9% on year in December, easing from the 6.2% increase registered in November and the lowest rate since September. Consumer prices rose 6.7% on year by European Union harmonized standards after increasing by 7.1% the previous month, the data showed.

The data added to further signs of easing price pressures a day after Germany’s consumer price index also fell by more than expected for last month.

Investors will have a large batch of U.S. data to consume in the next few sessions, which may underscore how successful the Federal Reserve’s sharp monetary policy tightening in 2022 has been in damping activity to tackle high inflation. Minneapolis Fed President Neel Kashkari, a voting member of the rate-setting Federal Open Market Committee this year, said in an essay on Wednesday that he projects the Fed’s benchmark rate will rise up to 5.4% and “potentially much higher.”

On Wednesday, U.S. data showed the ISM manufacturing activity index fell to 48.4 in December from 49 the prior month in a sign of weakness, and job openings fell to 10.45 million in November from 10.51 million the prior month. At 2 p.m. Eastern time, the Fed is set to release the minutes of its December policy meeting.

Thursday brings the ADP private sector employment report, initial jobless claims and the S&P Global survey of the services sector, while Friday will deliver the ISM services sector index and December nonfarm payrolls report from the U.S. Labor Department. Several Fed officials also will be making comments.

Markets are pricing in a 70.3% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.50% to 4.75% on Feb. 1, according to the CME FedWatch tool. The central bank is mostly expected to take its fed funds rate target to at least 4.75% to 5% by June, according to 30-day Fed Funds futures.

What analysts are saying

“EU interest rates ratcheted the rally to another level overnight, forcing US rates outside recent technicals.  The 10-yr UST faced resistance at 3.71%, but that was knocked out after modest purchases in Asia,” said Jim Vogel, executive vice president of FHN Financial in Memphis.

“The catalyst for the latest buying wave was a big downside miss in French inflation in December’s preliminary numbers,” he wrote in a note.

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