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Treasury yields retreated Tuesday morning, ahead of a reading of U.S. wholesale inflation for October, while fixed-income investors also are anticipating a fresh round of speakers from the Federal Reserve and an auction of 10-year notes later in the session.
What are yields doing?
-
The 10-year Treasury yield
TMUBMUSD10Y,
1.466%
was at 1.459%, down from 1.496% on Monday at 3 p.m. Eastern Time. -
The 2-year Treasury note yield
TMUBMUSD02Y,
0.438%
was at 0.411%, compared with 0.447% a day ago. -
The 30-year Treasury bond rate
TMUBMUSD30Y,
1.848%
yields 1.854%, down from 1.887% on Monday.
What’s driving the market?
Fixed-income markets have been trading in a narrow range, but yields have been tilting lower, since the Federal Reserve last Wednesday announced the start of a reduction in its monthly bond purchases now that the economy is recovering from the COVID-19 pandemic.
Measures of inflation will continue to serve as a gauge of how quickly the central bank removes its accommodative monetary policies and aims to eventually raise interest rates.
The yield on Treasury inflation-protected securities, or TIPS, for the 30-year bond to its lowest level since the inception of the instrument in 1998. Bloomberg News reported that 30-year TIPS on Monday fell by about 7 basis points to minus 0.508%.
On Tuesday, investors will be watching for the October producer-price index, which showed some moderation in September but still offered little proof that the highest bout of inflation in 30 years is fading. Economists are expecting that a reading of wholesale inflation, PPI, for October will show a rise of 0.6% on the month, compared with a rise of 0.5% in September.
The PPI reading comes ahead of data on the October consumer price index on Wednesday.
At its policy meeting last week, the Fed said that elevated inflation appears to be reflecting factors that are expected to be transitory, and Chairman Jerome Powell said the central bank could remain “patient” about when to raise interest rates as it kicked off the tapering of its bond purchases. Powell also said that it was possible that the job market could improve sufficiently to warrant interest-rate increases by the second half of 2022.
Fed speakers on Tuesday will include St. Louis Fed President James Bullard, who was slated to speak at a UBS European Conference at 7:50 a.m. Eastern, while Powell speaks at a Fed diversity conference at 9 a.m., and San Francisco Fed President Mary Daly speaks at 11:35 a.m. in a moderated discussion at the NABE Tech Economics Conference.
On Monday, Vice President Richard Clarida said inflation and employment remain the focus for the central bank: “While we clearly are a ways away from considering raising interest rates, if the outlooks for inflation and unemployment…turn out to be the actual outcomes, then I do believe that these three conditions for raising the target range of the funds rate will have been met by year-end 2022.”
Investors, meanwhile, continue to focus on the possible successors to Powell whose term ends next February. Bloomberg News on Monday reported that the Fed Lael Gov. Brainard is being considered as a candidate to succeed Powell as Fed chair.
Looking ahead, fixed-income investors will be watching for an auction of $39 billion in 10-year Treasury notes at 1 p.m.
In other economic reports, the NFIB Small Business Optimism Index decreased to 98.2 in October from 99.1 in September, below the 99.5 consensus forecast from economists polled by The Wall Street Journal.
What analysts are saying
“US inflation expectations have been on fire. And with that, real yields are screaming negative,” wrote Gregory Faranello, head of U.S. rates at AmeriVet Securities, in a Tuesday research note.
“We still believe real yields look too low, but with the Fed pushing back on the timeline for rate hikes and inflationary pressures still very elevated, we get what we have: 10-year real yields close to cycle lows. Investors are still craving protection against inflationary forces,” Faranello wrote.
