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Bond Report: Treasury yields nudge higher as economic growth worries wane ahead of looming Fed minutes report

Bond yields nudged higher on Tuesday as steadier risk appetite and energy prices hobbled demand for fixed-income assets.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
3.199%

added 1.7 basis point to 3.195%. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury
TMUBMUSD10Y,
2.796%

rose 1 basis point to 2.796%.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.091%

fell 1 basis point to 3.093%.

The 10-year Treasury yield is down 69 basis points from the 52-week high touched in mid June, but remains up 129 basis points for the year to date.

What’s driving markets

Bond buyers were on the back foot, pushing yields a touch higher, as a rally in the previous session — bolstered by a very weak U.S. east coast manufacturing survey and signs of a slowing Chinese economy — showed signs of fading.

“After U.S. activity and inflation data last week had an air of ‘goldilocks’ feel to them, economic data out of China and the U.S. to start the week came in clearly on the ‘too cold’ side for global growth,” said Brian Daingerfield, head of G10 FX strategy at NatWest Markets.

The 10-year to 2-year spread of about minus 40 basis points means the yield remains deeply inverted, signaling a looming economic downturn.

Bond yields had been further pressured at the start of the week by a sharp slide in oil prices, which bolstered hopes that the U.S. had witnessed peak inflation in June.

The news on both these fronts is somewhat altered on Tuesday. Crude prices are steadier and news out of China suggesting Beijing is prepared to support the struggling property sector has salved global growth concerns.

Traders must next contend with U.S. data due for release on Tuesday, which include July housing starts and permits at 8.30 a.m. Eastern and industrial production for July at 9.15 a.m. Eastern.

Meanwhile, lurking in the background is the latest update on Fed thinking in the shape of the minutes from its recent monetary policy meeting.

Alex Pelle and Steven Ricchiuto, U.S. economists at Mizuho Securities, think the market may be unprepared for the tone the central bank adopts.

“We expect the Fed’s July meeting minutes released on Wednesday to be quite hawkish. Meeting-by-meeting forward guidance has been laid to rest, but forward guidance in general has not,” they said in a note to clients.

“Markets interpreted the July Fed meeting a dovish, despite the central bank’s 75-bp hike, and in response, Fed speakers across the hawk-dove spectrum have spent much of the past few weeks trying to disabuse the market of the view that the Fed will fail to follow through its policy projections in the latest summary of economic projections,” the Mizuho strategists added.

Markets are pricing in a 59.5% probability that the Fed will raise interest rates by another 50 basis points to a range of 2.75% to 3.00% after its meeting ending Sept. 21. The central bank is expected to take its borrowing costs to 3.63% by April 2023, according to Fed Funds futures.

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