July 23, 2024
Treasury yields higher as investors assess interest rate outlook

Treasury yields higher as investors assess interest rate outlook

Bond yields rose on Monday as appetite for risk across markets reduced demand for sovereign debt, while investors continued assessing what could be next for the Federal Reserve’s interest-rate decision at its June 13-14 policy meeting.

What’s happening

  • The yield on the 2-year Treasury TMUBMUSD02Y, 4.495% slipped by 6 basis points to 4.545% versus 4.501% at 3 p.m. Eastern on Friday. Yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.681% dropped 2 basis points to 3.668% compared with 3.691% Friday afternoon.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.870% fell 1 basis point to 3.868%, compared with 3.882% late Friday.

What’s driving markets

Appetite for risk across global markets was damping demand for U.S. Treasuries, with yields also nudged higher by last week’s jobs report, which suggested the U.S. economy has so far absorbed the Federal Reserve’s rate-hike cycle without too much damage.

However, the jobs data also suggested that wage inflation was easing, and this was encouraging investors to bet on the Fed pausing its policy of monetary tightening after its meeting next week.

Markets are pricing in a 79.5% probability that the Fed will leave interest rates unchanged at a range of 5.0% to 5.25% after its meeting on June 14, according to the CME FedWatch tool. Just a week ago that probability was 36%, and the chances of a 25 basis point hike was 64%.

However, the probability of another 25 basis point rate rise in July has climbed from 5% a month ago to nearly 50% on Monday.

In U.S. economic data, most U.S. businesses grew at a slower pace in May as customer demand leveled off, a new survey showed. The ISM services index fell to a five-month low of 50.3% last month. Numbers above 50% indicate companies are expanding, but the U.S. economy has slowed markedly from a year ago.

What are analysts saying?

“The week after payrolls is almost always a bit quiet for data and this week we have the added kicker of a Fed that has started their media blackout period ahead of next week’s FOMC. Remember that U.S. CPI comes out on Tuesday 13th, a day ahead of the FOMC decision,” said Jim Reid, strategist at Deutsche Bank.

“If the Fed wants to subtlety communicate to the market one way or another ahead of next week then well-placed media stories might surface. However, before CPI that does seem unlikely as nothing will be 100% decided until then. We are back to having a fair bit of uncertainly over the near-term Fed outlook though,” Reid added.

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