Treasury yields notched their biggest monthly advance since September and October on Tuesday, as signs of stubborn inflation in Europe increased concerns that central banks will continue tightening monetary policy.
The 6-month T-bill rate
TMUBMUSD06M,
5.086%
rose to 5.13% as of 3 p.m. New York time, just shy of its highest level since March 12, 2007, according to Tradeweb.
What happened
- The yield on the 2-year Treasury note
TMUBMUSD02Y,
4.594%
was marginally higher at 4.795% from 4.791% on Monday. Yields move in the opposite direction to prices. - The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.705%
was down less than 1 basis point at 3.914% versus 3.921% as of Monday afternoon. - The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.710%
rose 1 basis point to 3.928% from 3.918% late Monday. - For all of February, the 2-year yield advanced 58.8 basis points, while the 10-year rate rose 38.7 basis points — both of which were the largest one-month gains since September, based on 3 p.m. figures from Dow Jones Market Data. Meanwhile, the 30-year rate advanced 26.9 basis points, its largest monthly gain since October.
What drove markets
Data from Europe, released on Tuesday, showed further evidence of sticky inflation across developed economies.
The French consumer-price index unexpectedly increased 6.2% in February, up from 6% the month before. Spanish inflation also came in hotter than expected. And U.K. grocery inflation climbed to a record 17% year-over-year during the four weeks that ended on Feb. 19. The reports suggest the eurozone-wide consumer prices report due on Thursday may show inflation once again picking up speed.
German 2-year bond yields
TMBMKDE-02Y,
3.087%
briefly jumped above 3.2%, the highest since 2008, as the market fully priced in the European Central Bank taking interest rates to a peak of 4% by February 2024.
Two-year U.K. gilt yields
TMBMKGB-02Y,
3.636%
moved to a four-month high above 4% after the report on British grocery prices.
The evidence of stubborn inflation in Europe matches the signal from last Friday’s U.S. PCE report, which many traders see as raising the chances that the Federal Reserve will keep borrowing costs higher for longer.
Markets are pricing in a 76.7% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5% on March 22, according to the CME FedWatch tool. The central bank is mostly expected to take its fed-funds rate target to between 5.25% and 5.5%, or higher, by September, according to 30-day fed funds futures.
In U.S. data released on Tuesday, consumer confidence slipped to a three-month low of 102.9 in February on worries about a recession and the Case-Shiller 20-city home price index dropped 0.5% for December. Meanwhile, the trade deficit in goods climbed to a three-month high of $91.5 billion for January.
Read: Fed’s Goolsbee says this is a ‘strange and unprecedented moment’ for U.S. economy
What analysts are saying
“The longer rates remain high, the greater the real economic impact on both households and companies,” said BMO Capital Markets strategists Ben Jeffery and Ian Lyngen. “Particularly as the borrowing executed at much lower rates over the better part of the last three years need[s] to be refinanced, higher debt costs in an elevated inflationary environment serves as reminder that the cushion of easy access to capital has been removed.”
“In a more traditional environment, this risk might be enough to inspire the Fed to reconsider their commitment to leaving rates in restrictive territory for a lengthy period of time,” they wrote in a note. “However, this represents precisely the outcome Powell is pursuing to bring inflation down, and with the March FOMC [Federal Open Market Committee meeting] quickly approaching, we’ll look for the updated SEP [Summary of Economic Projections] to reflect exactly this policy bias.”
Treasury yields notched their biggest monthly advance since September and October on Tuesday, as signs of stubborn inflation in Europe increased concerns that central banks will continue tightening monetary policy.
The 6-month T-bill rate
TMUBMUSD06M,
5.086%
rose to 5.13% as of 3 p.m. New York time, just shy of its highest level since March 12, 2007, according to Tradeweb.
What happened
- The yield on the 2-year Treasury note
TMUBMUSD02Y,
4.594%
was marginally higher at 4.795% from 4.791% on Monday. Yields move in the opposite direction to prices. - The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.705%
was down less than 1 basis point at 3.914% versus 3.921% as of Monday afternoon. - The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.710%
rose 1 basis point to 3.928% from 3.918% late Monday. - For all of February, the 2-year yield advanced 58.8 basis points, while the 10-year rate rose 38.7 basis points — both of which were the largest one-month gains since September, based on 3 p.m. figures from Dow Jones Market Data. Meanwhile, the 30-year rate advanced 26.9 basis points, its largest monthly gain since October.
What drove markets
Data from Europe, released on Tuesday, showed further evidence of sticky inflation across developed economies.
The French consumer-price index unexpectedly increased 6.2% in February, up from 6% the month before. Spanish inflation also came in hotter than expected. And U.K. grocery inflation climbed to a record 17% year-over-year during the four weeks that ended on Feb. 19. The reports suggest the eurozone-wide consumer prices report due on Thursday may show inflation once again picking up speed.
German 2-year bond yields
TMBMKDE-02Y,
3.087%
briefly jumped above 3.2%, the highest since 2008, as the market fully priced in the European Central Bank taking interest rates to a peak of 4% by February 2024.
Two-year U.K. gilt yields
TMBMKGB-02Y,
3.636%
moved to a four-month high above 4% after the report on British grocery prices.
The evidence of stubborn inflation in Europe matches the signal from last Friday’s U.S. PCE report, which many traders see as raising the chances that the Federal Reserve will keep borrowing costs higher for longer.
Markets are pricing in a 76.7% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5% on March 22, according to the CME FedWatch tool. The central bank is mostly expected to take its fed-funds rate target to between 5.25% and 5.5%, or higher, by September, according to 30-day fed funds futures.
In U.S. data released on Tuesday, consumer confidence slipped to a three-month low of 102.9 in February on worries about a recession and the Case-Shiller 20-city home price index dropped 0.5% for December. Meanwhile, the trade deficit in goods climbed to a three-month high of $91.5 billion for January.
Read: Fed’s Goolsbee says this is a ‘strange and unprecedented moment’ for U.S. economy
What analysts are saying
“The longer rates remain high, the greater the real economic impact on both households and companies,” said BMO Capital Markets strategists Ben Jeffery and Ian Lyngen. “Particularly as the borrowing executed at much lower rates over the better part of the last three years need[s] to be refinanced, higher debt costs in an elevated inflationary environment serves as reminder that the cushion of easy access to capital has been removed.”
“In a more traditional environment, this risk might be enough to inspire the Fed to reconsider their commitment to leaving rates in restrictive territory for a lengthy period of time,” they wrote in a note. “However, this represents precisely the outcome Powell is pursuing to bring inflation down, and with the March FOMC [Federal Open Market Committee meeting] quickly approaching, we’ll look for the updated SEP [Summary of Economic Projections] to reflect exactly this policy bias.”
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