U.S. Treasury yields edged higher on Monday, with the policy-driven two-year rate hitting a near 15-year high, a day ahead of a much-anticipated August inflation reading.
What is happening
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2-year Treasury bond yield
TMUBMUSD02Y,
3.627% rose to 3.571% from 3.569% at 3:00 PM ET on Friday. The 2-year yield was the highest since Nov. 7, 2007, based on the 3 p.m. yield, according to Dow Jones Market Data. Yields move in the opposite direction to prices.
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The 10-year Treasury yield
TMUBMUSD10Y,
3.357% rose to 3.361% from 3.321% on Friday afternoon and the highest since June 15.
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The yield on 30-year Treasury bonds
TMUBMUSD30Y,
3.514% was 3.513% against 3.456% on Friday evening, reaching its highest level since April 21, 2014.
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The 10-year to 2-year spread of minus 23 basis points means that yields remain inverted, signaling an impending economic downturn.
What drives the markets
U.S. government bond yields initially fell but then rose ahead of Tuesday’s key consumer price data, which is likely to confirm that the Federal Reserve may make another aggressive rate hike when policymakers meet next week.
The annual headline CPI missed its peak, but July’s 8.5% per year was still close to a 41-year high. Meanwhile, central bankers have recently been actively emphasizing the need to be aggressive in easing price pressures.
Analysts believe that a sharp drop in gasoline prices in the US may contribute to a slight decrease in the headline CPI in August compared to the previous month. Economists expect that compared to the same period last year, the indicator will decrease to 8%.
Markets are pricing in a 92% chance the Fed will raise interest rates by another 75 basis points to a range of 3% to 3.25% at its September 20-21 meeting. The central bank is expected to push its target federal funds rate to at least 3.75%-4% by December, according to CME’s FedWatch tool.
The US Treasury’s auction of $41 billion in 3-year Treasuries produced an “average” figure, while the sale of $32 billion in 10-year Treasuries yielded a coverage ratio of 2.37, close to the lower end of the range over the past few years , said Thomas Simmons, money market economist at Jefferies.
What the strategists say
“At the start of the week we expect to see confirmation of what investors expect will be another 75bp hike when the Committee meets on 21 September. August’s CPI data will be the starting point for full pricing in three-quarters of a point tightening, “leaving the market to wonder how much of the surprise policymakers can ignore in the ‘aggregate’,” said BMO Capital Markets strategists Ian Lingen and Ben Jeffrey.
