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Bond Report: Treasury yields remain mixed, with 10-year rate pulling back from 2%, ahead of Thursday’s inflation report


The yield on the closely watched 10-year Treasury pulled back from 2% on Wednesday, after hitting the highest level since July 2019 in the prior session, as investors prepare for the next U.S. inflation reading.

A January reading of the U.S. consumer price index, released on Thursday, will be poured over to assess the direction of monetary policy. Meanwhile, the 30-year inflation-adjusted yield on Treasuries hovered above zero for the fourth straight session as of early Wednesday, according to data from Tradeweb.

What are yields doing?

The 10-year Treasury note TMUBMUSD10Y, 1.923% yields 1.92%, down from 1.954% at 3 p.m. Eastern Time on Tuesday. Tuesday’s level was the highest since July 31, 2019, according to Dow Jones Market Data.
The 2-year Treasury note TMUBMUSD02Y, 1.350% rate sits at 1.346% versus 1.339% a day ago.
The differential between the short-term 2-year note and the benchmark 10-year, known as the yield curve, narrowed to 57 basis points.
The 30-year Treasury bond TMUBMUSD30Y, 2.227% rate was at 2.219%, compared with 2.250% on Tuesday afternoon.

What’s driving the market?

Until Wednesday, most Treasury yields had been on a recent upward trajectory after the U.S. central bank signaled that it will start to tighten policy, notably by possibly kicking off a series of interest-rate hikes in March. Market-based projections point to a 73% chance of a 0.25 percentage point increase and a 27% likelihood of a 0.50 percentage point hike next month, according to data from CME Group CME, +3.73% using federal-funds futures.

Meanwhile, expectations are for the January CPI to show a 0.4% increase after a 0.5% rise in the prior month — with the year-over-year reading expected to show a 7.2% climb after U.S. inflation for December hit its fastest pace in nearly four decades.

In addition to the U.S. consumer price index report on Thursday, investors were watching Wednesday’s sale of $37 billion in 10-year debt. The auction produced a “record-low dealer takedown” and “record-high indirects,” according to Jefferies economists Thomas Simons and Aneta Markowska.

Among Fed speakers on Wednesday, Cleveland Fed President Loretta Mester said she wants a faster pace of rate hikes than in the tightening cycle seen from 2015 to 2018. “This time, I anticipate that it will be appropriate to move the funds rate up at a faster pace because inflation is considerably higher and labor markets are much tighter than in 2015,” she said.

The Cleveland Fed president, who is a voting member of the Fed’s interest rate setting committee this year, also said last month that the Fed will be able to let its balance sheet run down at a faster pace than it did during the past cycle.

What strategists are saying

“Today’s 10-year auction was strong,” wrote BMO Capital Markets strategist Ben Jeffery. “10s were outperforming going into the auction on below average volumes and since the result, yields have dropped and the curve has moved flatter.”

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