The yield on the closely watched 10-year Treasury pulled back from 2% in early Wednesday trading, after hitting the highest level since July 2019 in the prior session, as investors prepare for the next U.S. inflation reading .
A January reading of the U.S. consumer price index, released on Thursday, will be poured over to assess the direction of monetary policy. Meanwhile, the 30-year inflation-adjusted yield on Treasuries hovered above zero for the fourth straight session early Wednesday, according to data from Tradeweb.
What are yields doing?
- The 10-year Treasury note TMUBMUSD10Y, 1.944% yields 1.935% basis points, 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, 1.350% rate sits at 1.338% versus 1.339% a day ago.
- The differential between the short-term 2-year note and the benchmark 10-year, known as the yield curve, stood at 60 basis points.
- The 30-year Treasury bond TMUBMUSD30Y, 2.244% rate was at 2.236%, compared with 2.250% on Tuesday afternoon.
What’s driving the market?
Until Wednesday, most Treasury yields had been on a recent upward trajectory after the U.S. central bank signaled that it will start to tighten policy, notably by possibly kicking off a series of interest-rate hikes in March. Market-based projections point to a 71% chance of a 0.25 percentage point increase and an almost one-out-of-three likelihood of 0.50 percentage point hike next month, according to data from CME Group CME, +4.15% using federal-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.
In addition to the U.S. consumer price index report for January on Thursday, investors are looking ahead to a sale of $37 billion in 10-year debt at 1 p.m. Wednesday. The refunding auction could help to gauge appetite for Treasurys against tighter monetary policy from the Fed and elevated inflation readings.
Among Fed speakers on Wednesday, Fed Gov. Michelle Bowman will speak at 10:30 a.m. ET, while Cleveland Fed President Loretta Mester is scheduled to speak at noon.
The Cleveland Fed president, who is a voting member of the Fed’s interest rate setting committee this year, 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
“This afternoon’s 10-year refunding auction offers a gauge of investor demand for Treasuries on the eve of a hiking campaign. The results will also provide a litmus test for dip buying appetite; although the modest overnight bid suggests the first attempt to push 10-year yields through the 1.971% support level was met by some interest,” wrote BMO Capital Markets strategists Ian Lyngen and Ben Jeffery, in a Wednesday note.
