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WASHINGTON, March 13 – US Treasury yields rose further on Wednesday as traders speculated that stubborn US inflation evident in recent data may convince the Federal Reserve to hold off cutting rates until after June, the timeframe currently priced in by markets.

Benchmark 10-year notes yields were last up 3.1 basis points (bps) on the day at 4.187%, marking three consecutive days of increases. Two-year yields were little changed at 4.615%.

This follows Tuesday’s report showing the consumer price index (CPI) rising 0.4% last month, driven largely by higher costs for gasoline and shelter. So-called core prices – excluding food and energy prices – also gained 0.4%. Headline prices rose 3.2% on an annual basis, while core prices gained 3.8%.

Traders in Fed funds futures reduced bets that the Fed will cut rates by June to 66.7%, from 70% on Tuesday, according to the CME Group’s FedWatch tool.

No Fed policymakers are scheduled to speak this week ahead of the central bank’s March 19-20 meeting.

“This has been the dynamic since December – the battle between market expectations of what the Fed is going to do and the Fed’s expectations of themselves,” said Jack McIntyre, portfolio manager for global fixed income at Brandywine Global.

The inversion in the yield curve between two-year and 10-year notes narrowed to minus 43.4 basis points from minus 44 basis points on Tuesday.

The market is closely watching new data for the path of US economic growth, which in turn informs the central bank’s plans for rate cuts. Tuesday’s CPI and previous reports had raised concerns that inflation was heating back up.

“The timing and pace (of inflation) is what’s a little frustrating but I still think things are moving in the right direction,” McIntyre said.

New data from the Mortgage Bankers Association on Wednesday showed mortgage applications increased 7.1% for the week ending March 8 from a week earlier. This adds to market concerns that the Fed may hold off on rate cuts beyond previous expectations, according to McIntyre.

The Fed is expected to hold rates steady when it meets next week, with market focus on policymakers’ updated economic and interest rate projections.

The US Treasury on Wednesday auctioned USD 22 billion in 30-year bonds drawing a high yield of 4.331% and a bid-to-cover ratio of 2.47, slightly higher than the February average of 2.40 and the 2.39 average for the last 10 auctions of 30-year bonds.

The relatively strong 30-year action followed Tuesday’s lackluster USD 39 billion auction of 10-year notes, which likely contributed to the continued rise in 10-year yields, according to Guy LeBas, chief fixed income strategist at Janney Capital Management.

“There were some concerns about how this 30-year auction was going to come in,” said LeBas.”There were a lot of question marks around whether it prices at 4.36% or 4.33%.”

The yield on existing 30-year bonds ticked down 1.2 basis points to 4.338% after the auction from 4.349% before.

The next major data points watched by traders will come on Thursday. These include the producer price index and retail sales for February, as well as the latest initial jobless claims for the week ending March 9.

Traders are also following the Bank of Japan and its upcoming meetings on March 18 and 19, according to LeBas, which could result in the central bank raising interest rates from their current minus 0.1% level.

“There’s a decent chance of using their incoming meetings to move from ZIRP (zero interest rate policy) to LIRP (low interest rate policy),” LeBas said.

“Very generally, a bank or an asset manager doesn’t care if they buy a 10-year Japanese and hedge it back into dollars or buy a 10-year dollar. So if Japan rises, that’s going to pull back US yields.”

(Reporting by Matt Tracy; Editing by Tomasz Janowski and Andrea Ricci)

 

March 12 – US Treasury yields rose on Tuesday after consumer price inflation for February came in slightly above economists’ expectations, raising concerns that the Federal Reserve may not be able to cut interest rates as soon as investors expect if price pressures remain elevated.

The 10-year Treasury yield got an extra lift after weak demand at the Treasury’s auction of USD 39 billion of the benchmark note.

The consumer price index (CPI) rose 0.4% last month amid higher costs for gasoline and shelter, and so-called core prices also gained 0.4%. On an annual basis, headline prices rose 3.2% while core prices gained 3.8%.

“Sticky inflation seems to be very much intact at this point,” said Phillip Colmar, global strategist at MRB Partners in New York. “This is problematic for the bond market and the Fed’s view that inflation’s ultimately coming down to that 2% target.”

Fed funds futures traders reduced bets that the Fed will cut by June to 69%, from 72% on Monday, according to the CME’s FedWatch.

Benchmark 10-year notes yields were last up 5.8 basis points (bps) on the day at 4.156%. Two-year yields gained 6.9 bps to 4.600%.

The inversion in the yield curve between two-year and 10-year notes was little changed at minus 44.4 bps.

Traders are closely watching data for signs of when the US central bank will cut rates as economic growth remains strong. Reports showing higher-than-expected inflation and employment in January had raised concerns that inflation could be reheating, though the data was also likely affected by seasonal factors.

The Fed is expected to hold rates steady when it meets on March 19-20, though traders will focus on Fed policymakers’ updated economic and interest rate projections.

Traders will now shift their focus to the Thursday release of February’s producer price index and initial jobless claims for the week ending March 8.

“In terms of implications for the Fed, while today’s report alone may not be enough to stop the Fed from cutting rates midyear, it should raise real questions about the extent to which inflation will move back to target absent some further easing in the labor market,” Tiffany Wilding, managing director and economist at PIMCO, said in a Tuesday note.

Also on Tuesday, the US Treasury held a 10-year auction that was poorly received. The high yield of 4.166% was more than the market expected at the bid deadline, suggesting that investors demanded a premium to absorb the note.

The bid-to-cover ratio, a gauge of demand, was 2.51, slightly lower than the February level of 2.56 and slightly above the 2.48 average.

“It was a bit surprising because that concession going into the auction didn’t seem to lead to spectacular results,” said Michael Lorizio, senior fixed-income trader at Manulife Investment Management.

“But it wasn’t read as an aggressive liquidity event. So pricing came in line with a small tail, and it gave us direction but it wasn’t an abandonment.”

The Treasury Department will next sell USD 22 billion in 30-year bonds US30YT=RR on Wednesday.

(Reporting by Matt Tracy and Karen Brettell; Additional reporting by Karen Brettell and Herbert Lash; editing by Jonathan Oatis)

 

BENGALURU, March 12 – A key indicator of an oncoming recession implied by the US bond market is no longer reliable, according to nearly two-thirds of strategists polled by Reuters.

A persistent negative spread between 2-year and 10-year US Treasury yields is a key input into many analysts’ models as a reliable predictor of recession, having occurred in the lead-up to nearly all recessions since 1955. It offered a false signal just once during that time.

The yield curve has been inverted for more than 20 months now – currently by 46 basis points – but most of the recent discussion in markets has been about the probability of no recession or even the risk of a re-acceleration in economic growth.

Nearly two-thirds of strategists in a March 6-12 Reuters poll of bond market experts, 22 of 34, said the yield curve’s predictive power is not what it once was.

“I feel the inverted yield curve is just not as good an indicator as before,” said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management.

“If you have these two things going on together – insatiable demand for the long-end from real money like pension funds and the Fed keeping front-end rates higher because of the resilience of the economy – the curve will stay inverted for a while.”

Since the 2007-2008 global financial crisis, the Federal Reserve has on multiple occasions conducted aggressive buying of Treasury securities as part of is stimulus program, meaning it owns a much larger proportion of the market in its own portfolio than it did before.

Many observers have argued over recent years this ownership is distorting market pricing, although strategists interviewed to discuss the latest poll results did not mention suppressed yields via “quantitative easing” as a reason.

“The difficulty this time is that the policy rate is more than double the fed (funds rate’s) longer-run equilibrium, and it’s the magnitude and speed of rate hikes that have contributed to the inversion,” said Steve Major, global head of fixed income research at HSBC.

In the meantime, financial markets have aggressively scaled back bets this year on when the Fed will first cut interest rates, from March to May and now to June.

This has led several strategists to ramp up 12-month forecasts for the rate-sensitive 2-year Treasury note yield US2YT=RR by a median 21 basis higher than one month ago to 3.68%.

The benchmark 10-year Treasury note yield US10YT=RR, currently at 4.10%, too was seen falling only a modest 19 basis points to 3.91% by the end of August, and to 3.75% in a year, according to 60 strategists polled.

“Disinverting” the curve requires these short-term yields to fall much more sharply than longer-term ones, or for longer-term yields to rise.

In addition to a decision on when to cut, the Fed will soon have to judge when to slow and then finally stop unloading some of the securities it purchased through its massive “quantitative tightening” program.

Asked when the Fed would start slowing, or tapering, the pace of shrinkage of its balance sheet, 14 of 26 respondents said in June. Other responses ranged from March to December.

Seventeen of 26 said the Fed would conclude its tapering program either in the first quarter of 2025 or later.

(Reporting by Sarupya Ganguly; Polling by Anitta Sunil, Rahul Trivedi, and Sujith Pai; Editing by Ross Finley and Paul Simao)