Treasury yields tick higher as Fed goes quiet

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Bond yields are a fraction firmer amid a dearth of fresh catalysts.

What’s happening
  • The yield on the 2-year Treasury
    TMUBMUSD02Y,
    4.185%
    was barely changed at 4.194%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    TMUBMUSD10Y,
    3.507%
    added 2 basis points to 3.50%.

  • The yield on the 30-year Treasury
    TMUBMUSD30Y,
    3.680%
    fell 2.5 basis points to 3.678%.

What’s driving markets

Investors have little fresh news on which to place bets on Monday and consequently moves in Treasury yields are relatively meagre.

Benchmark 10-year Treasury yields sit just 10 basis points or so above their lowest level since mid September.

They have have fallen about 0.75 percentage points from their 52-week high of 4.231 hit in October on expectations the U.S. economy is fading in the face of the Federal Reserve’s tightening of monetary policy as it battles high inflation.

It’s a quiet start to the week for U.S. economic data, with just the leading economic indicators for December due for release at 10 a.m. Eastern. And there are no Fed speakers in coming days as the central bank is now in its blackout period ahead of its next decision on interest rates, due February 1st.

Markets are pricing in a 99.8% 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 next week, according to the CME FedWatch tool. The central bank is expected to take its Fed funds rate target to 4.95% by June 2023, according to 30-day Fed Funds futures.

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In Europe, the benchmark 10-year German bund yield
TMBMKDE-10Y,
2.180%
rose 2.4 basis points to a two-week high of 2.199% after European Central Bank President Christine Lagarde reiterated late last week that she expected to continue raising interest rates to dampen inflation and a survey of economists showed most expected the EU to avoid recession this year.

What are analysts saying

“As central banks prepare to stop or pause hiking by the summer, the financial conditions loop becomes less of a driving force as the market flips from obsessing about inflation risk to obsessing about growth/recession risk. So we could see an extended period where bond/equity correlations turn negative again. In other words, investors who are worried about growing recession risk may see bonds as a good hedge for risky assets once again (at least in the short run),” said Stephen Innes, managing partner at SPI Asset Management.

“Another dynamic comes from perceptions of weakening growth and easing monetary policy relative to the run of Fed Speak. While U.S. growth data are admittedly weak, much of it has come from ‘soft data’, with hard activity data holding up much better. And while there have been several Fed speakers voicing a preference for another downshift, hawk Waller, most notably, in the pace of hikes, the market is translating this into a lower terminal rate again,” Innes added.

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