Volatile trading in 2-year Treasurys ahead of U.S. CPI data


U.S. bond yields mostly rose on Tuesday in choppy trading as investors awaited the February consumer price index inflation data.

What’s happening
  • The yield on the 2-year Treasury
    rose by 25.3 basis points to 4.238%.

  • The yield on the 10-year Treasury
    added 5.1 basis points to 3.628%.

  • The yield on the 30-year Treasury
    fell 1.1 basis points to 3.706%.

What’s driving markets

Bond markets remained volatile at the short end of the yield curve — with the 2-year Treasury trading in a 40 basis point range early Tuesday — as traders waited to see the U.S. February CPI inflation data, due for release at 8:30 a.m. Eastern.

The yield on the 2-year note at one stage plunged more than 60 basis points on Monday, the biggest drop since 1982 according to Bloomberg, as investors piled into short-duration government paper in the belief that the unfolding U.S. banking crisis would hit the economy and encourage the Federal Reserve to soon halt its monetary tightening policy.

If the CPI report show further declines in inflation then it will make it easier for the Fed to adopt that less hawkish stance, investors reckon.

The annual rate of headline CPI growth is forecast to have fallen to 6% last month from 6.4% in January. Annual core CPI is expected to dip to 5.5% from 5.6%

Markets are pricing in a 73.1% probability that the Fed will raise its policy 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.

During Monday’s session the chances of no rate hike and a 25 basis point hike were about fifty-fifty after U.S. regulators had to intervene to support regional banks following the collapse of Silicon Valley Bank of California on Friday.

The central bank is expected to take its Fed funds rate target to 4.88% by May 2023, according to 30-day Fed Funds futures. A week ago the so-called terminal rate was seen hitting about 5.6% in October.

What are analysts saying

“U.S. inflation has been the talk of town for several months now, although the focus has lately turned chiefly to financial contagion risks that may stop the Fed from switching back to a higher rate hike path trajectory,” said strategists at Saxo Bank in a note.

“In fact, several banks are now calling for a pause next week, with one also expecting a rate cut and an end to quantitative tightening. Still, the US February CPI – due to be released today – will be a big test after last month’s print reversed the disinflation narrative in goods inflation and continued to point at sticky services inflation.”

“Despite the SVB’s failure, we still believe the February CPI release will be particularly relevant for the FOMC’s March policy decision as the Fed may try to pretend that it can focus on business as usual. Evidence of economic resilience and persistent price pressures would prolong the Fed’s tightening cycle. However, by year-end, we expect the U.S. economy will start to experience more significant disinflationary pressures,” Saxo concluded.




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