Treasury yields pull back slightly as traders await economic data


Treasury yields retreated early Thursday ahead of a batch of economic data, a day after the Federal Reserve left interest rates unchanged, as expected, at the conclusion of its policy-setting meeting.

The central bank didn’t do anything to dispel market expectations that it will lift interest rates in June, the seventh time for such a move since the end of 2015, as it aims to normalize monetary policy. But policy makers appeared to hint that they had little fear that inflation was running out of control, which traders took as a sign the Fed won’t feel compelled to move more aggressively than expected to lift rates in the future.

How are Treasurys performing?

The 10-year Treasury note yield

TMUBMUSD10Y, -0.94%

fell 1.9 basis points to 2.945%, while the 30-year bond yield

TMUBMUSD30Y, -1.14%

slipped by 1.5 basis points at 3.119%.

The 2-year note yield

TMUBMUSD02Y, -0.65%

the most sensitive to shifting expectations for monetary policy, shed 1.9 basis points to 2.476%.

Bond yields fall as prices rise.

The gap between the 2-year and 10-year Treasury notes, often considered the heart of the yield curve, held at 46.9 basis points on Thursday.

Read: Fed signals it won’t overreact to this summer’s expected higher inflation rate

Concerns that the yield curve could eventually invert, with short-dated yields moving above long-dated yields, is keeping investors on edge. An inverted yield curve has often preceded a recession.

What’s driving the market?

Bond market investors are likely to key in on data after the Fed’s policy statement, which acknowledged a recent firming of inflation, heading toward the central bank’s annual 2% target, with the Fed’s preferred inflation gauge, the personal-consumption expenditures index for March, rose to a 12-month rate of 2% for the first time in a year.

However, given the dormancy of price pressures, the Fed’s statement implied a level of comfort that aggressive action may not be warranted to tamp down inflation. Rising inflation can erode a bond’s fixed value, causing investors to sell government paper and pushing yields higher.

Fed officials are split between whether to raise rates three or four times this year. The market, as gauged by the federal-funds rate indicate about even odds for a further three rate increases this year.

Ultimately, the Federal Open Market Committee’s position underscores a path of rate tightening in the U.S., while European and Asian policy makers are more tentatively attempting to end their crisis-era policy plans—a fact that may further drive foreign appetite, though bidding has recently been weak, for Treasurys, limiting yield moves.

Looking ahead, investors are awaiting a key reading of nonfarm payrolls due on Friday, which could provide additional clues on inflation.

What data are in focus?
  • Weekly jobless claims data are due at 8:30 a.m. Eastern Time
  • March trade deficit also is set for 8:30 a.m., with $49.4 billion from $57.6 billion in February
  • Reports on unit labor costs and productivity for the first quarter are expected at 8:30 a.m.
  • Markit services PMI for April is set for 9:45 a.m.
  • April ISM services report is due at 10 a.m.
  • A reading on factor orders for March also is scheduled for 10 a.m.
What are strategists saying?

“So inflation ‘has moved close to’ their target and ‘is expected to run near’ the target,” wrote Marshall Gittler, chief strategist and head of education at research-and-data company ACLS Global, in a Thursday note, dissecting the FOMC’s policy statement.

“This is not the same as ‘has hit the target’—close, but no cigar! This despite the fact that indeed the FOMC’s preferred measure of “overall inflation,” the personal consumption expenditure (PCE) deflator, has moved not just close to 2% but in fact is over 2%. Apparently they don’t trust one month’s data, which is reasonable. But at the same time, they dropped the comment about ‘monitoring inflation developments closely,’ which does imply more confidence about hitting the target.

“If inflation stays at this level, they’ll have to change that wording further at the June meeting (when another rate hike is 97% expected), and that could be the trigger for further dollar strength,” Gittler said.

What other assets are in focus?

The 10-year German bond yield

TMBMKDE-10Y, -5.63%

a proxy for the health of the eurozone economy, stood at 0.554%, compared with 0.576% in the previous session.

Source : MTV