Bond yields continued to decline on Thursday as traders made adjustments following the news that U.S. inflation is at its lowest level in over two years.
- The yield on the 2-year Treasury TMUBMUSD02Y, 4.653% slipped by 8.8 basis points to 4.662%. Remember, yields move in the opposite direction of prices.
- The yield on the 10-year Treasury TMUBMUSD10Y, 3.819% retreated by 3.9 basis points to 3.823%.
- The yield on the 30-year Treasury TMUBMUSD30Y, 3.936% fell by 1.2 basis points to 3.939%.
What’s Driving Markets
Investors are flocking to bonds, leading to lower Treasury yields, as they hope that cooling inflation will result in a less aggressive tightening of the Federal Reserve’s monetary policy.
Recent data, released on Wednesday, showed an annual inflation rate of 3% in June, significantly lower than the 9.1% from a year ago. A week ago, the 2-year Treasury yield was trading just above 5%, but it has now dropped to 4.662% as of early Thursday.
While the markets still expect a 25 basis point increase in interest rates by the Fed at its meeting on July 26 (according to the CME FedWatch tool), there is now only an 11% chance of another 25 basis point hike in September, compared to around 28% a week ago.
Central Bank Expected to Hold Rates Until April 2024
The Federal Reserve is projected to maintain its current target for the Fed funds rate until April 2024, according to 30-day Fed Funds futures. Previously, the market estimated that rates would not reach this level until June 2024.
Economic Updates and Fedspeak on the Horizon
On Thursday, the U.S. will release important economic updates, including the weekly initial jobless claims and June producer prices data at 8:30 a.m. Eastern time. Additionally, there will be Fedspeak throughout the day, with San Francisco Fed President Daly giving a TV interview at 11:10 a.m., and Fed Governor Waller speaking at 6:45 p.m.
Treasury to Auction $18 Billion Worth of 30-Year Bonds
The U.S. Treasury will conduct an auction of $18 billion in 30-year bonds at 1 p.m.
Analysts Weigh In
According to Jan Nevruzi, U.S. rates strategist at NatWest Markets, the recent Consumer Price Index (CPI) did not significantly affect expectations for the upcoming Fed meeting. However, next year’s forwards rallied, indicating higher confidence in a future rate hike. Nevruzi believes that while the data does not necessarily justify a rate increase, the Fed’s cautious approach may be influenced by a desire to see another soft inflation number before making any major decisions.