U.S. bond yields dipped slightly as traders awaited the consumer price index report for January, due at 8:30 a.m. Eastern.
What’s happening
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The yield on the 2-year Treasury
TMUBMUSD02Y,
4.494%
slipped by 3.8 basis points to 4.503%.
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The yield on the 10-year Treasury
TMUBMUSD10Y,
3.689%
retreated 1 basis point to 3.695%.
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The yield on the 30-year Treasury
TMUBMUSD30Y,
3.765%
fell 1.2 basis points to 3.767%.
Two-year U.S. government bond yields, which are particularly sensitive to monetary policy, sit near their highest level since November, having risen sharply in recent sessions following more hawkish Federal Reserve rhetoric and upbeat economic news.
What’s driving markets
Economists forecast that the headline annual CPI inflation rate will have dropped from 6.5% in December to 6.2% last month and the core reading — which strips out particularly volatile items like food and energy — to dip from 5.7% to 5.4%.
However, the month-on-month readings are expected to be up 0.4%, compared to minus 0.1% in December, and a core unchanged at 0.3%.
Even if the CPI report matches expectations the market is pricing in an 88% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5.0% after its meeting on March 22nd, according to the CME FedWatch tool.
The central bank is expected to take its Fed funds rate target to 5.2% by August 2023, according to 30-day Fed Funds futures.
U.K. government bonds are bucking the broader market, with 10-year gilt
TMBMKGB-10Y,
3.448%
yields up 2.3 basis points to 3.426% following stronger-than-expected employment data.
What are analysts saying
“Everything in the last few weeks has pointed to near-term upward pressure on U.S. inflation in the early part of this year even if it eventually falls more sharply later in the year,” said Jim Reid, strategist at Deutsche Bank.
“Will markets and the Fed look through this if it happens? That’s the big question,” he said, noting the rise in the 10-year yield and the implied rates from the July and December fed funds futures contracts .
“Since the [last Fed rate decision], we’ve had a very strong payrolls, the highest used car price growth for 14 months, and revisions to core CPI that showed a less aggressive disinflation path than originally reported,” Reid warned.
