Bond Yields inch higher as traders await inflation report

After the latest comments from Fed officials, bond yields have seen a slight increase early Tuesday, with traders closely monitoring an upcoming inflation report.

What's happening

• The yield on the 2-year Treasury BX:TMUBMUSD02Y remained relatively stable at 4.379%. Remember, yields move in the opposite direction of prices.
• The yield on the 10-year Treasury BX:TMUBMUSD10Y experienced a minor increase of less than 1 basis point, reaching 4.041%.
• The yield on the 30-year Treasury BX:TMUBMUSD30Y rose by 1.3 basis points to 4.207%.

What's driving markets

Following stronger-than-expected jobs data released last Friday, ten-year Treasury yields have surpassed 4% and are currently trading near their highest levels in a month. As a result, expectations for Federal Reserve interest rate cuts this year have been tempered.

The market has closely observed statements from Fed officials as they continue to provide mixed forecasts for the central bank's policy trajectory.

Fed Governor Michelle Bowman stated on Monday, "Should inflation continue to approach our 2% goal in the long run, it may be appropriate to gradually decrease our policy rate to prevent excessive restriction."

However, Bowman also expressed concerns about the possibility of a reacceleration of growth and subsequent inflation due to recent easing in financial conditions.

Economic Updates and Market Expectations

The New York Fed recently released a survey, revealing that one-year inflation expectations for households are currently at their lowest point since January 2021. This comes as welcome news for the central bank.

Looking ahead, traders are closely watching for the December data on U.S. consumer price inflation, scheduled to be published on Thursday. This will be followed by the release of producer prices data the next day.

On Tuesday, there will be updates on the U.S. economy, including the trade deficit for November at 8:30 a.m. Eastern time. Additionally, the Fed's Vice Chair for Supervision, Michael Barr, will participate in a discussion at noon.

Market expectations are currently indicating a 95.3% probability that the Fed will maintain interest rates within a range of 5.25% to 5.50% after its upcoming meeting on January 31st, according to the CME FedWatch tool. However, there is a 60% chance of at least a 25 basis point rate cut by the subsequent meeting in March, which has decreased from 79% just a week ago.

At 1 p.m., the Treasury will hold an auction for $52 billion of 3-year notes.

Expert Analysis

According to Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, the anticipation of a soft CPI report from the U.S. on Thursday and the ongoing decline in crude oil prices provide some relief to investors' concerns about future inflation. This is despite the escalating shipping costs arising from tensions in the Red Sea.