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Bond Report: 2-year Treasury yield ticks up to nearly 15-year high ahead of Tuesday’s U.S. inflation data

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U.S. Treasury yields ticked higher on Monday, with the policy-sensitive two-year rate notching an almost 15-year high, a day ahead of an eagerly awaited reading on August inflation.

What’s happening

The yield on the 2-year Treasury note
TMUBMUSD02Y,
3.573%

edged up to 3.571% from 3.569% at 3 p.m. Eastern on Friday. The 2-year rate was the highest, based on 3 p.m. yields, since Nov. 7, 2007, according to Dow Jones Market Data. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.355%

rose to 3.361%, up from 3.321% Friday afternoon and its highest since June 15.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.509%

was 3.513% versus 3.456% late Friday, hitting its highest since April 21, 2014..

The 10-year to 2-year spread of minus 23 basis points means the yield remains inverted, signaling a looming economic downturn.

What’s driving markets

Yields on U.S. government bonds initially pulled back but then moved higher ahead of crucial consumer price data on Tuesday that’s seen as likely to confirm another aggressive rate hike by the Federal Reserve is likely when policy makers meet next week.

The annual headline rate of the consumer-price index is off its peak, but the July reading of 8.5% year-over-year was still near a 41-year high. Meanwhile, central bank policy makers have been vocal of late in stressing the need to be aggressive in damping price pressures.

Analysts reckon that sharp pullbacks in U.S. gasoline prices may help the headline CPI number show a small month-on-month decline for August. Economists expect the year-over-year rate to fall to 8%.

See: Traders see inflation falling for rest of 2022, but that likely won’t end Fed rate hikes or market volatility

Markets are pricing in an 92% likelihood that the Fed will raise interest rates by another 75 basis points to a range of 3% to 3.25% at its Sept. 20-21 meeting. The central bank is expected to take its fed funds rate target to at least 3.75%-4% by December, according to the CME FedWatch tool.

The Treasury’s auction of $41 billion of 3-year notes produced “average” stats, while the sale of $32 billion of 10-year notes produced a bid-to-cover ratio of 2.37, near the bottom end of the range of the last few years, said Thomas Simons, money-market economist at Jefferies.

What strategists are saying

“It’s the beginning of a week that we expect will provide confirmation of what investors anticipate will be another 75 bp hike when the Committee meets on September 21. August’s CPI data will be the departure point for fully pricing in a three-quarter point tightening, leaving the market to ponder how much of a downside surprise policy makers can ignore in the ‘totality’ framework,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery.

Market Extra: T-Mobile sees huge demand for $3 billion bond deal despite September borrowing blitz by big companies

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