Treasury yields trade slightly lower ahead of inflation reports

NEW YORK – US Treasury yields slipped on Monday as the market marked time for inflation data later in the week that should be pivotal for Federal Reserve policymakers to confirm if an easing at their September meeting is warranted.

Japanese markets were closed on Monday and many US participants are taking August vacations. So, after the gyrations of a week ago, there was scant motivation to trade ahead of July producer price data on Tuesday and, especially, the release of the Consumer Price Index on Wednesday.

After the Treasury rally over the last week and a half during which a breakout of fear about a recession pushed benchmark yields to 14-month lows, investors are now looking to lock in yields in case of a hard landing, said Robert Tipp, chief Investment Strategist at PGIM Fixed Income in Newark, New Jersey.

Most have not been impressed by soft landings during the 2000s and are thinking: “‘We need to get in here and lock in the long rates even though 200 basis points of cuts are priced in because the next thing you know is it is going to be further than that’,” Tipp said.

With inflation trending toward the Fed’s 2% target and recent payrolls data indicating labor market tightness is abating, the futures market is pricing in at least a 25 basis point ease from the current 5.25%-5.50% Fed funds rate at the next FOMC meeting in September, four quarter-point cuts by the end of 2024 and almost as many next year.

With no August Federal Open Market Committee meeting, it leaves market players to hope Fed chair Jerome Powell signals intentions at the Jackson Hole Economic Policy Symposium next week.

Fed Governor Michelle Bowman softened her usually hawkish tone ever so slightly on Saturday, noting some further “welcome” progress on inflation in the last couple of months even as she said inflation remains “uncomfortably above” the central bank’s target and subject to upside risks.

“The major catalyst this week is CPI on Wed. I would describe it as ‘checking the box’ ahead of a probable September rate cut,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

“As long as the CPI report isn’t tragic, I don’t think there is a lot of ultimate market import in it.”

LeBas added that a few corporate bond deals on Monday were keeping light pressure on interest rates.

Benchmark 10-year note yields were off 3.8 basis points at 3.904%. They rose 15 basis points last week, the largest one-week increase since April, after recovering from last Monday’s sharp sell-off to the lowest since June 2023.

Yields on two-year notes, which typically move in step with interest rate expectations, fell 4.4 bp to 4.0089% having also posted the biggest one-week increase since March after a drop to the lowest level since May 2023.

The yield curve between two- and 10-year Treasury notes steepened 1.2 basis points to minus 10.7 basis points. It steepened to 1.50 basis points a week ago, briefly turning positive for the first time since July 2022.

The breakeven inflation rate on five-year TIPS was 1.9837%, suggesting investors see inflation averaging under 2% over the next five years. The five-year TIPS BEI, fell below 2% on Aug. 2 for the first time since early 2021. The 10-year BEI was 2.1153%.

TIPS ‘real’ yields fell to 1.77% and 1.797% on the five- and 10-year, respectively.

TD Securities said in a note on Monday that real yields look attractive as BEI are too low.

“We look for the Fed to start easing in September, pushing both nominal and real rates lower. However, we expect rates to drift higher in the near term,” the firm said on Monday.

(Reporting by Alden Bentley; editing by Jonathan Oatisand Nick Zieminski)