US yields climb as inflation muddles rate cut view

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)