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Bond Report: 10- and 30-year Treasury yields post third weekly drop in four weeks as inflation expectations slip

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Long-dated Treasury yields dropped on Friday and had their third weekly decline of the past four weeks, after U.S. economic data showed a decline in inflation expectations from the University of Michigan sentiment survey.

What’s happening?

The yield on the 2-year Treasury 
TMUBMUSD02Y,
3.128%

was down less than 1 basis point at 3.135%, relative to Thursday’s 3.142% level. It was up 1.6 basis points this week and 29.2 basis points over the last two weeks, according to Dow Jones Market Data as of 3 p.m. Eastern time.

The yield on the 10-year Treasury 
TMUBMUSD10Y,
2.925%

fell 2.8 basis points to 2.929% from 2.957% late Thursday. It declined 16.9 basis points this week. 

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.090%

slipped 1 basis point to 3.093% from 3.103% on Thursday. It fell 17.4 basis points this week, the largest weekly decline since the period that ended April 1.

The 10- and 30-year rates have each dropped three of the past four weeks.

What’s driving markets?

Data released on Friday from the University of Michigan consumer sentiment survey indicated that inflation expectations held steady or improved somewhat. The median expected year-ahead inflation rate was 5.2%, little changed from the past five months.

Meanwhile, U.S. retail sales climbed 1% in June, with some of that increase tied to higher prices for gasoline and food. Economists polled by The Wall Street Journal had forecast a 0.9% increase in retail sales last month. BMO Capital Markets strategist Ian Lyngen said the data was “inconclusive” or, in other words, failed to move the needle in the debate over whether the Federal Reserve will hike by 75 or 100 basis points later this month.

As of Friday, traders priced in a 31% probability that the Fed will raise its benchmark interest rate by 100 basis points, to a range of 2.5% to 2.75%, at its July 26-27 meeting in the wake of Wednesday’s consumer price index report, which put inflation at an almost 41-year high of 9.1% for June. Traders also see a 69% chance of a 75 basis point move.

Investors have been grappling with concerns that Fed monetary tightening could push the U.S. economy into recession, with the 2-year/10-year spread remaining below zero. On Friday, St. Louis Fed President James Bullard said he wants to get the Fed’s policy rate target to 3.75% to 4% by year-end, up from his previous target of 3.5%. It will be up to the Federal Open Market Committee on the exact steps to get there, he said.

The busy week of economic data also included U.S. import prices, which rose by less than expected last month, and the New York Fed’s Empire State business conditions index, a gauge of manufacturing activity in the state, which rose to 11.1 in July. Industrial output was down 0.2% in June after a revised reading for the prior month that came in flat.

What analysts are saying

“It’s been another turbulent week in financial markets,” said Craig Erlam, a senior market analyst at OANDA Corp. “The US inflation report on Wednesday is still having ripple effects in the markets … It promises to be a tense couple of weeks then and without the luxury of regular Fed commentary as the blackout period begins this weekend” leading up to the central bank’s July 26-27 meeting.

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