#Bond Report: Treasurys hold steady as Senate passes $1 trillion bipartisan infrastructure bill

What yields are doing

• The 10-year Treasury note yields
  TMUBMUSD10Y,
  1.342%
  1.341%, compared with 1.316% at 3 p.m. Eastern Time on Monday.

• The 30-year Treasury bond yields
  TMUBMUSD30Y,
  1.982%
  1.981%, versus 1.962% a day ago.

• The 2-year Treasury note yields
  TMUBMUSD02Y,
  0.228%
  0.224%, compared with 0.220% on Monday.

What’s driving the market?

Yields remained little changed Tuesday after the Senate voted 69-30 Tuesday to approve the bipartisan infrastructure bill, a move that sends the $1 trillion measure over to the House of Representatives for its approval.

The bill includes $110 billion for roads, bridges and other projects — as well as $66 billion for rail, $65 billion for broadband internet and $55 billion for water systems. Sources of funding for the measure include $205 billion from existing COVID-19 relief funds and an estimated $28 billion from new tax-reporting requirements on cryptocurrencies.

In other developments Tuesday, data showed that U.S. small business optimism retreated in July. The confidence index, based on a survey released by the National Federation of Independent Business, dropped 2.8 points to 99.7 last month after hitting the highest level since the November election in June.

Later today, fixed-income investors will watch for an auction of $58 billion in 3-year Treasurys
TMUBMUSD03Y,
0.444%
at midday, as well remarks by two Federal Reserve policy makers. Chicago Fed president, Charles Evans, also speaks at 2:30 p.m. ET to discuss the economy and monetary policy.

For the week, investors are awaiting the U.S. July consumer price index data due Wednesday, followed by the July producer price index due Thursday.

What analysts are saying

• Wednesday’s CPI release matters because “if we get another year-over-year reading around 5%, we are going to see immense pressure on the Fed to tighten,” said Fergus Hodgson, director at Econ Americas, a research and asset management firm. Though his base case is for the U.S. to return to 2.6% or 3% inflation readings by year-end, the risk of a stagflation outcome in the U.S. is “serious” and underappreciated in the markets, he said via phone. Any tapering of the Fed’s bond purchases would still be expansionary for monetary policy, and the risk is that “you make permanent rising inflation expectations, which are going to be difficult to turn around.” 

• “A period of consolidation in the wake of a significant repricing is a very typical trading pattern in Treasuries. The process of establishing a volume bulge around the 200-day moving-average is ultimately constructive on the prospects for the bullish tone to be retained,” BMO Capital Markets strategists Ian Lyngen and Ben Jeffery wrote in a Tuesday research note. They said they “suspect justification for higher yields won’t be in the offing until after Labor Day—when investors have a better sense of the back to school, back to the office dynamic.”