US yields climb as investors look toward data

NEW YORK – US Treasury yields rose on Friday, with that of the benchmark 10-year note set for its first weekly gain in three weeks after a series of lackluster auctions ahead of next week’s inflation data.

Yields have been choppy throughout the week, moving lower on economic data that indicated little movement in the labor market, while a services sector report hinted at a rekindling of inflationary pressures. Yields turned higher later in the session as the Treasury saw weak demand for a total of USD 125 billion in 3-year notes, 10-year notes and 30-year bonds.

The 10-year yield recorded its biggest weekly drop in two months last week, after a soft government payrolls report sharply increased expectations on the timing and amount of rate cuts from the Federal Reserve this year.

Data next week will include multiple readings on inflation, including the consumer price index (CPI), which will heavily influence rate expectations for the central bank.

The benchmark US 10-year Treasury note yield rose 3.9 basis points to 4.283% and was up 6.5 basis points on the week, on track for its biggest weekly gain since early July.

“We probably came down as far as we’re likely to, unless we get really much weaker data, and so our call is we stall at 4.25%, said Jay Hatfield, CEO of Infrastructure Capital Management in New York.

“It’s normal for this to back up, because we don’t know what CPI is going to be,” said Hatfield, who also cited the uncertainty surrounding the makeup of the Federal Reserve board of governors.

The yield on the 30-year bond rose 4.1 basis points to 4.853% and was up 4.9 basis points on the week after two straight weekly declines.

RATE EXPECTATIONS

Expectations for a rate cut of at least 25 basis points by the Fed at its September meeting stand at 89.4%, according to CME’s FedWatch Tool, up from 80.3% a week ago. According to LSEG data, the market is pricing in 58.3 basis points of cuts by the end of the year.

St. Louis Fed President Alberto Musalem said on Friday the Fed’s inflation and jobs goals both face risks, with policymakers needing to balance which seems the more serious threat in deciding whether it is appropriate to reduce rates.

A closely watched part of the US Treasury yield curve measuring the gap between two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 52.5 basis points.

US President Donald Trump on Thursday said he will nominate Council of Economic Advisers Chairman Stephen Miran to serve out the final few months of a newly vacant seat at the Fed while the White House seeks a permanent addition to the central bank’s governing board and continues its search for a new Fed chair.

Miran is replacing Fed Governor Adriana Kugler, who announced a surprise resignation last week, effective on Friday.

In a note to clients, JPMorgan chief US economist Michael Feroli said he now expects the Fed to cut interest rates by 25 basis points at its September meeting, citing signs of weakness in the labor market and uncertainty around Miran’s nomination.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, advanced 2.2 basis points to 3.756% and was up 5.8 basis points on the week, on pace for its biggest weekly gain since the week ending July 3.

(Reporting by Chuck Mikolajczak; Editing by David Holmes and Richard Chang)