Ten-year U.S. Treasury yields extended their rise above 4% as worries about stubborn inflation lingered.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.895%
gave up an early rise to dip 1.2 basis points to 4.883%. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
4.031%
added 3 basis points to 4.024%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.997%
climbed 2.1 basis points to 3.979%.
What’s driving markets
Concerns that inflation will stay stubbornly high for longer than expected are pushing up Treasury yields. The 10-year yield is back above 4%, its highest since November, and the 2-year yield earlier in the session came within several basis points of 5%, a 17-year peak, before easing back.
Over the last 24 hours Atlanta Fed President Raphael Bostic reiterated the need for the policy interest rate to rise above 5%, and Minneapolis Fed President Neel Kashkari said he was worried that there was little evidence the service sector was slowing sufficiently.
In addition, data from the eurozone showed CPI inflation of 8.5% in the year to February, only slightly lower than January’s reading of 8.6% and above forecasts of a dip to 8.2%. German 10-year bund yields
TMBMKDE-10Y,
rose 1.6 basis points to 2.730%, the highest since 2011.
Markets are pricing in a 69.4% probability that the Fed will raise its benchmark interest rate 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 chances of a 50 basis point hike have climbed from around 10% a few weeks ago to 30.6%
The central bank is expected to take its Fed funds rate target to 5.46% by October 2023, according to 30-day Fed funds futures. At the start of the year traders were betting that this so-called ‘terminal rate’ would peak below 5% in June.
U.S. economic updates set for release on Thursday include the weekly initial jobless claims and fourth quarter productivity and unit-labor costs, due at 8:30 a.m. Eastern.
What are analysts saying
Jan Nevruzi, U.S. rates strategist at NatWest Markets, noted that bond investors were concerned by a worrying inflationary signals contained with Wednesday’s otherwise soft ISM manufacturing report.
“The weakness in manufacturing isn’t news and the sector itself makes up a relatively small share of the US economy compared to services. What could have spooked markets might have been the separately reported Prices Paid component, which jumped from 44.5 to 51.3 (and above the 46.5 Bloomberg estimate),” Nevruzi wrote in a note to clients.
“On one hand, that reflects an increase in raw materials prices for the manufacturing industry, so we don’t really think it should carry a heavy weight in assessing inflationary pressures. On the other hand, goods prices within CPI have been slowly creeping up, while services are still high – if there is a rebound in inflation, it could come through the manufacturing channel again.”
