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Bond Report: Treasury yields extend drop after U.S. retail sales, wholesale inflation data

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Treasury yields fell after the Bank of Japan maintained its ultra-loose monetary policy and as traders eyed a batch of economic updates.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.177%

slipped by 2.6 basis points to 4.186%. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.479%

retreated 6.4 basis points to 3.486%.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.596%

fell 6 basis points to 3.601%.

What’s driving markets

The Bank of Japan was the early focus for fixed income investors on Wednesday. Japanese government bond yields plunged after the BoJ surprised the market by not changing its yield curve control policy, maintaining its ultra-loose stance.

The impact was felt in U.S. Treasuries, where benchmark 10-year yields swiftly fell around 8 basis points in sympathy before recovering somewhat. Attention will now turn to U.S. economic updates and how that may impact the thinking of the Federal Reserve.

Data set for release on Wednesday include December retail sales and the producer price index at 8:30 a.m.. Industrial production and capacity utilization for December will be published at 9:15 a.m.. The NAHB home builders’ index for January is due at 10 a.m. alongside November business inventories.

Markets are pricing in a 93.2% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.50% to 4.75% after its meeting on February 1st, according to the CME FedWatch tool. The central bank is expected to take its Fed funds rate target to 4.9% by June 2023, according to 30-day Fed Funds futures.

The Fed’s Beige Book of economic anecdotes will be published at 2 p.m. and Philadelphia Fed President Patrick Harker is due to speak at 3:15 p.m. followed by Dallas Fed President Lorie Logan who will make comments at 5 p.m.. All times Eastern.

European sovereign yields were less affected by the BoJ’s actions, preferring to concentrate on domestic issues. The U.K. 10-year gilt yield
TMBMKGB-10Y,
3.318%

rose 4.7 basis points to 3.373% after a report showed the country’s consumer price inflation easing back in December but still high at 10.5%.

Benchmark 10-year bund yields
TMBMKDE-10Y,
2.053%

were barely changed at 2.087% after data on Wednesday showed eurozone inflation fell from 10.1% in November to 9.2% in December, matching forecasts and an earlier estimate. European Central Bank Governing Council Member Francois Villeroy said the ECB would continue raising rates by 50 basis points, pushing back against reports suggesting it was considering slowing the pace of hikes to 25 basis points at its next meeting.

What are analysts saying

“The Fed’s next meeting just two weeks from now we start to come firmly into view, where investors are placing a very high weight on a downshift in the pace of rate hikes to 25bps,” said Jim Reid, strategist at Deutsche Bank.

“It also comes as further posturing takes place ahead of US debt ceiling negotiations. Yesterday, House Speaker McCarthy called on Senate Democrats and the White House to discuss conditions on raising the debt ceiling such as changes to major entitlement programs and discretionary spending, while White House Press Secretary Jean-Pierre remained adamant that the Biden Administration would not be negotiating over the debt ceiling.”

“Treasury Secretary Yellen told lawmakers late last week that the government would need to start using “extraordinary measures” by the end of this week in order to avoid running out of cash,” Reid wrote in a morning bulletin.

Read: U.S. to hit debt limit Thursday: Here’s what that means

The Fed: Fed’s Bullard doesn’t want to ‘stall’ on getting interest rates over 5%

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