Bond Report: Treasury’s 2-year adds to rise to 52-week high yield ahead of inflation reports

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Treasury yields traded mixed on Tuesday, as fixed-income traders returned from the three-day, Columbus Day holiday weekend and attention turned to this week’s round of U.S. inflation data and minutes from the Federal Reserve.

The two-year rate, which captures near-term expectations for Fed policy rates, rose to a fresh 52-week high, while longer-dated yields fell amid growing negative sentiment on the U.S. economy’s outlook.

What are yields doing?
  • The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    1.575%

    declined 2.5 basis points to 1.579%, compared with 1.604% at 3 p.m. Eastern on Friday. Yields and debt prices move in opposite directions.

  • The 2-year Treasury note yield
    TMUBMUSD02Y,
    0.345%

    rose 3 basis points to 0.338% from 0.318% Friday afternoon. It was the highest level since March 24, 2020, based on 3 p.m. levels, and came after six consecutive trading days of gains, according to Dow Jones Market Data.

  • The 30-year Treasury bond yield
    TMUBMUSD30Y,
    2.100%

    declined 5.5 basis points to 2.106% from 2.161% on Friday.

  • It was the biggest one-day declines for 10-year and 30-year yields since Oct. 1.

What’s driving the market?

With the Treasury market closed Monday for the Columbus Day holiday, traders are awaiting the September reading of the U.S. consumer-price index, which is due Wednesday morning. Later that day, 2 p.m. Eastern Time, the Federal Reserve is set to release the minutes from its Sept. 21-22 meeting, where the central bank signaled its intention to dial back on its bond-buying program soon.

Rising commodity prices, led by oil and natural gas, have contributed to concerns about potential inflationary pressures, alongside widespread supply-chain bottlenecks, analysts said. Traders and investors are bracing for Wednesday’s reading on consumer prices to potentially exceed expectations, just as optimism over a global recovery is slipping away.

Read: Global growth outlook is darkening just as the next major U.S. inflation report is about to land

The range of economists’ estimates for Wednesday’s year-over-year headline CPI number are between 5% and 5.5%, with a consensus of 5.3% that matches August’s headline CPI reading. That is surprising because anecdotal reports of labor and supply shortages have only worsened in September, while average hourly pay has gone up, energy prices have been surging, and consumer expectations are shifting.

On Tuesday, Atlanta Federal Reserve President Raphael Bostic appeared to break ranks with other Fed leaders, by saying the recent burst of U.S. inflation is likely to last longer than expected and no longer should be considered “transitory.”

By contrast, the Fed’s No. 2, Vice Chairman Richard Clarida, speaking earlier in the day, said that the unwelcome surge of inflation will be “largely transitory,” reiterating a refrain uttered by a number of Fed policy makers, even as Fed Chairman Jerome Powell recently acknowledged the uncertain duration of increasing pricing pressures on the economy.

The comments by Clarida and Bostic came as the International Monetary Fund lowered its estimate of global growth to 5.9% this year, down one-tenth of a percent from July, and sees that slowing even further to 4.9% in 2022. For the U.S., the IMF cut its growth estimate for this year down to 6%.

Meanwhile, the National Federation of Independent Business on Tuesday said its optimism index slipped one point to 99.1 in September, the lowest reading since March, as small-business owners remained frustrated by shortages of supplies and skilled labor.

Other data released Tuesday showed that U.S. job openings dropped to 10.4 million in August from 11.1 million previously.

Meanwhile, the Treasury Department’s $58 billion auction of 3-year notes
TMUBMUSD03Y,
0.607%

stopped 0.2 basis points short of the when-issued yield despite “poor indirect participation,” while a $38 billion 10-year note reopening produced “very strong indirects,” said Jefferies LLC economists Thomas Simons and Aneta Markowska.

In overseas developments, news reports said China Evergrande Group, the troubled real-estate developer, missed a third round of bond coupon payments in three weeks, underlining worries about China’s highly leveraged property sector.

What are analysts saying?
  • “Five of the last six YOY CPI prints have been greater than the median estimate and we remain at cycle highs in inflation,” managing director Ian Burdette of Academy Securities wrote in an email to MarketWatch. “We do think there is a decent probability that the market’s median estimate is, once again, perhaps too conservative and we may be in for another slight upside surprise in the headline numbers.”

  • “With investor anticipation continuing to build ahead of tomorrow’s CPI release from the U.S., yesterday saw yet another round of commodity price rises that’s making it increasingly difficult for central banks to argue that inflation is in fact proving transitory,” said Jim Reid, strategist at Deutsche Bank, in a note.

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