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Two-year Treasury yields held near 15-year highs on Tuesday as signs of stubborn inflation in Europe increased concerns that central banks will continue tightening monetary policy.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.807%
rose by 1.3 basis points to 4.803%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.947%
added 2.2 basis points to 3.941%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.955%
gained 1 basis point to 3.940%.
What’s driving markets
Treasury yields moved back toward recent highs after data from Europe showed further evidence of sticky inflation across developed economies.
The French consumer price index increased 6.2% in February, up from 6% the month before. Spanish inflation also came in hotter than expected. The reports suggest the eurozone-wide consumer prices report due on Thursday may show inflation once again picking up speed.
Benchmark German 2-year bond yields
TMBMKDE-02Y,
jumped 9 basis points to 3.157%, the highest since 2008 as the market fully priced in the European Central Bank taking interest rates to a peak of 4% by February 2024.
Two-year U.K. gilt yields
TMBMKGB-02Y,
moved to a four-month high above 4% after a report from Kantar showed British grocery prices rising at a record annual pace of 17.1% in the four weeks to February 19th.
The evidence of stubborn inflation in Europe matches the signal from last Friday’s U.S. PCE report, which many traders reckon raises the chances that the Federal Reserve will keep borrowing costs higher for longer.
Markets are pricing in a 75.3% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5.0% after its meeting on March 22nd, according to the CME FedWatch tool. The central bank is expected to take its Fed funds rate target to 5.41% by September 2023, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Tuesday include the trade balance in goods, retail inventories and wholesale inventories, all for January and all due at 8:30 a.m. Eastern. The Case Shiller home price index for January will be published at 9 a.m. followed at 10 a.m. by the February consumer confidence report.
Chicago Fed President Austan Goolsbee is due to speak at 2:30 p.m.
What are analysts saying
In a note published before the European inflation data, RBC Capital Markets’ chief U.S. economist Tom Porcelli wrote: “We are adding in two additional 25bp hikes beyond the March meeting. We think terminal of that magnitude (5.5% top end of the range) is unnecessary and there seems to be an overreaction to recent data, but clearly what we think in this regard doesn’t matter when you have a Fed clearly intent on doing more. What happens to the cuts we’re forecasting around year-end? At this point we see no reason to remove them.”
“If our view that the unemployment rate gets to 4.5% by year-end is roughly right, as long as it also coincides with our other view that core inflation has slowed to around 3%, we think the Fed will cut. If inflation is moving in the right direction and the u-rate is moving in the wrong direction, it doesn’t seem like a stretch to think the Fed would take back some of these very aggressive hikes (you could call it “recalibrating” cuts).”
