The 10-year Treasury yield pulled back on Wednesday, after hitting its highest level since July 2019 in the prior session, while the 2-year yield carved out another 52-week high as investors prepare for the next U.S. inflation reading.
A January reading of the U.S. consumer-price index, due on Thursday, will be pored over to assess the direction of monetary policy. Meanwhile, the 30-year inflation-adjusted yield on Treasurys hovered above zero for the fourth straight session as 3 p.m. Eastern time Wednesday, according to data from Tradeweb.
What are yields doing?
The 10-year Treasury note TMUBMUSD10Y, 1.946% yield declined 2.6 basis points to 1.928%, down from 1.954% at 3 p.m. Eastern Time on Tuesday. Tuesday’s level was the highest since July 31, 2019, according to Dow Jones Market Data.
The 2-year Treasury note TMUBMUSD02Y, 1.366% yield rose less than 1 basis point to to 1.346% versus 1.339% a day ago. It’s the highest level since Feb. 21, 2020, based on 3 p.m. levels, according to Dow Jones Market Data.
The differential between the short-term 2-year note and the benchmark 10-year, known as the yield curve, narrowed to 59 basis points.
The 30-year Treasury bond TMUBMUSD30Y, 2.248% rate declined 1.8 basis points to 2.232%, compared with 2.250% on Tuesday afternoon.
What’s driving the market?
Until Wednesday, most Treasury yields had been on an upward trajectory after the U.S. central bank signaled that it would start to tighten policy, by kicking off a series of interest-rate hikes in March. Market-based projections point to a 73% chance of a 0.25 percentage point increase next month and a 27% likelihood that the move will be 0.50 percentage point, according to data from CME Group CME, +3.36% using fed funds futures.
Meanwhile, expectations are for the January CPI to show a 0.4% increase after a 0.5% rise in the prior month — with the year-over-year reading expected to show a 7.2% climb after U.S. inflation for December hit its fastest pace in nearly four decades.
Read: High inflation has jacked up the cost of food, gas, cars and rent – and there’s little relief in sight
In addition to the U.S. consumer-price index report on Thursday, investors watched Wednesday’s sale of $37 billion in 10-year debt. The auction produced a “record-low dealer takedown” and “record-high indirects,” according to Jefferies economists Thomas Simons and Aneta Markowska.
Among Fed speakers on Wednesday, Cleveland Fed President Loretta Mester said she wants a faster pace of rate increases than in the tightening cycle seen from 2015 to 2018. “This time, I anticipate that it will be appropriate to move the funds rate up at a faster pace because inflation is considerably higher and labor markets are much tighter than in 2015,” she said.
Mester said she doesn’t see a “compelling case” for a half-point rate rise in March. The Cleveland Fed president, who is a voting member of the Fed’s interest rate setting committee this year, also said last month that the Fed will be able to let its balance sheet run down at a faster pace than it did during the past cycle.
What strategists are saying
“The case for a bearish response to the January inflation data has been incrementally improved by today’s rally,” wrote BMO Capital Markets strategists Ian Lyngen and Ben Jeffery. “It’s difficult to argue the relevance of the January inflation data for the broader macro narrative; however, given the recent price action it’s less obvious that the market is poised for another repricing.”