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Bond Report: Treasury yields nudge higher ahead of U.S. retail sales data

Bond yields inched higher but held near recent lows as hopes U.S. inflation has peaked underpinned Treasuries.

What’s happening

The yield on the 2-year Treasury

rose by less than 1 basis point to 4.353%. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury

added 1.2 basis points to 3.789%.

The yield on the 30-year Treasury

climbed 1.2 basis points to 3.976%.

What’s driving markets

Treasury yields were a touch firmer on Wednesday, but holding near six week lows after investors welcomed recent data signaling cooling U.S. inflation.

Markets are pricing in an 81% probability that the Fed will raise interest rates by another 50 basis points to a range of 4.25% to 4.50% after its meeting on December 14th, according to the CME FedWatch tool. The central bank is expected to take its Fed funds rate target to 5.1% by June 2023, according to 30-day Fed Funds futures.

U.S. retail sales for October are due for release at 8:30 a.m. Eastern. Traders will be eager to see how much consumers may have been impacted by inflation running just below 40-year highs and the higher borrowing costs deployed to combat it.

October industrial production at 9:15 a.m. and September business inventories alongside the NAHB home builders index at 10 a.m. are also on the slate for Wednesday.

Another batch of Fed officials take to the podium, too. New York Fed President John Williams is due to speak at a Treasury market conference at 9:50 a.m.; Fed Vice Chair Michael Barr is set to testify on regulation at the House Financial Services Committee at 10 a.m.; and Fed Governor Christopher Waller is down to talk on the economic outlook at 2:35 p.m. All times Eastern.

Meanwhile, U.K. 10-year gilt yields

fell 2.1 basis points to 3.273% despite data showing surging food and energy prices pushed inflation up more than expected to 11.1%, the highest since October 1981. Investors are waiting for the U.K. finance ministers Autumn Budget statement on Thursday.

What are analysts saying

“Bonds and equities managed to hold onto their post-data surge after U.S. producer price inflation eased by more than expected. That follows on the heels of last Thursday’s downside surprise in consumer price inflation, and added to the narrative that we’re past the worst on inflation and that the Fed will soon be able to slow down its rate hikes,” said Jim Reid, strategist at Deutsche Bank.

Reid added that recent moves in Treasuries has caused the yield spread between 2-year and 10-year bonds to approach 60 basis points “making it the most inverted the curve has been since 1982, which is alarming when you consider its record as a recessionary indicator, having inverted prior to all of the last 10 US recessions”.

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