Yields rise on jitters ahead of GDP data, Fed meeting

NEW YORK, Jan 24 – Treasury yields rebounded on Wednesday as investors demanded a higher risk premium after a strong reading of US business activity before key data later this week and a Federal Reserve meeting next week that could suggest a path ahead for rate cuts.

Yields trimmed initial declines after a flash reading by S&P Global showed US business activity picked up this month and inflation appeared to abate, with prices charged by companies for their products sliding to a more than 3-1/2 year low in a sign the American economy kicked off the year on a strong note.

Yields later shot higher after the Treasury Department sold USD 61 billion of five-year notes at auction for a high yield of 4.055%, or higher than trading at the bidding deadline.

In addition to the first reading on Thursday of US gross domestic product for 2023 and on Friday the Personal Consumption Expenditures index (PCE) on inflation, the market is assessing rising Treasury supply, said Andrzej Skiba, head of the BlueBay US fixed income team at RBC Global Asset Management.

“When you combine a bit of jittery price action ahead of quite a lot of data over the next two sessions with the realization that there’s going to be pretty heavy Treasury issuance in the coming weeks, that is putting some pressure on Treasury yields,” Skiba said.

Treasury supply has quickly turned positive from negative, he said. “We’re going to be USD 100 billion positive this coming month and that’s only going to step up,” Skiba said.

The Treasury Department will issue a general financing estimate next Monday and details on any auction size increases on Wednesday.

The two-year Treasury yield, which reflects interest rate expectations, rose 3.2 basis points to 4.380%, while the benchmark 10-year yield added 4 basis points to 4.182%.

The difference in yields on two- and 10-year notes was at -20.0 basis points as the yield curve flattened further. The shorter-dated security’s yield has been higher than the longer-dated, or inverted, since July 2022 in what’s proven in the past to be a recession harbinger.

While the market last year had recession worries “the concern now is we’ve never had the Fed easing in a full employment environment,” said Jimmy Chang, chief investment officer at the Rockefeller Global Family Office in New York.

“There’s still too many people believing that the first rate cut could happen in March. It will be interesting to see how the Fed manages that expectation at the conclusion” of the policymaker’s meeting next week, Chang said.

The odds that policymakers cut rates in March have fallen to 41.5% from just over a 75% probability a month ago, according to CME Group’s FedWatch Tool, after Fed officials last week pushed back on expectations of up to 150 basis points of cuts this year.

The Treasury will sell USD 41 billion of seven-year notes on Thursday.

The yield on the 30-year Treasury bond was up 3.7 basis points to 4.416%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.281%.

The 10-year TIPS breakeven rate was last at 2.302%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Herbert Lash; Editing by Andrea Ricci and Ros Russell)