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Bond Report: 10-year Treasury yield back above 3% after U.S. inflation rate comes in at 8.3% for April

Treasury yields fell early Wednesday ahead of an eagerly awaited inflation reading that will be watched for signs that price pressures are finally beginning to peak.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.929%

fell to 2.929%, compared with 2.99% at 3 p.m. Eastern on Tuesday. Yields and debt prices move opposite each other.

The yield on the 2-year Treasury note
TMUBMUSD02Y,
2.594%

was at 2.586% versus 2.623% Tuesday afternoon.

The 30-year Treasury bond yield
TMUBMUSD30Y,
3.080%

was at 3.073%, down from 3.127% late Tuesday.

What’s driving the market?

All eyes are on the release of the April consumer price index at 8:30 a.m. Eastern.

The index is expected to have climbed 8.1% annually from 8.6% the previous month, according to a survey of economists by Dow Jones and The Wall Street Journal, which would mark the first time in five months the index hasn’t climbed at the fastest rate in 40 years.

Core prices are due to rise 0.4% from a 0.3% gain in March, when the data is released at 8:30 a.m.

Treasury yields have risen sharply in 2022 as investors react to surging inflation and the Federal Reserve’s scramble to rein in price pressures. The Fed last week raised its fed funds rate by 50 basis points, or half a percentage point, rather than moving in its usual quarter-point increment. Fed Chairman Jerome Powell has said half-point moves, rather than the central bank’s usual quarter-point increment, are on the table for the next two meetings.

A slower inflation pace on Wednesday, however, won’t necessarily signal the tide in the fight against inflation has turned, analysts said. Continued supply-chain disruptions, rising fuel costs, a tight labor market and other factors remain at play.

Read: Here are 4 reasons why market volatility is unlikely to soon subside

What do analysts say?

“All in all, today’s release should support the idea that peak inflation is behind us, especially in the U.S.,” wrote econmists at UniCredit Bank, in a note.

“Looking at recent price action, this picture already appears to be discounted: [10-year] U.S. breakeven (BE) rates have declined 25bp (basis points) so far in May and around 35bp from the peaks of mid-April. Short-dated BE rates have fallen even more, with the inversion in the BE curve declining to 110bp from a peak of almost 200bp in late March,” they wrote. “Hence, we expect an asymmetric reaction to the U.S. CPI reading, with higher-than-expected data leading to a more pronounced reaction in BE (to the upside) compared to the decline we expect to see in the event of lower-than-expected inflation.”

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