A slate of US economic data is about to put the loftiest Treasury yields this year to the test.
Traders will be watching retail sales data to be released at 8:30 a.m. in Washington and the producer price index on Friday for clues on the health of the world’s largest economy. Weekly jobless claims, import prices and business surveys by the Federal Reserve Banks of New York and Philadelphia that are among the earliest gauges of the economy’s performance in February are also due Thursday.
The figures will help traders assess how soon the Federal Reserve will begin cutting interest rates. A hotter-than-expected inflation print earlier this week led markets to pare wagers on a cut before June and trim the amount of easing expected for this year to fewer than four quarter-point rate cuts from almost five a week ago.
“The growth story is much stronger than people expected coming into the year,” Tony Rodriguez, head of fixed-income strategy at Nuveen Asset Management, said on Bloomberg Television Wednesday. Inflation “at the margin is worse than it had been a month ago, but not materially different,” and doesn’t warrant higher yields for 10-year Treasuries, he said.
The yield on 10-year Treasuries surged to 4.33% this week, reaching a peak for the year and the highest level since November. Since then, it has come down to 4.22% with investors buying the dip.
Still, there remains a disconnect between how much easing the market expects and what policymakers consider likely, creating scope for yields to rise further. Fed policymakers’ median forecast in December was for a fed funds rate of 4.625% at year-end, 30 basis points higher than what’s implied by swaps.
In options markets, some traders are even betting that the Fed will raise rates again over the next year, according to Bloomberg Intelligence analyst Vera Tian.
For Evelyne Gomez-Liechti, a multi-asset strategist at Mizuho International Plc, the 10-year yield could rise back to 4.30% if retail sales are strong.
“The US consumer remains in good shape,” she said. “This underlying economic resilience will likely cap how much USTs can rally.”
But even if yields climb further, they’d still be far away from the highs reached late last year. Dario Messi, a fixed income analyst at Julius Baer, said he doubts yields will get back to peaks seen in October, when the 10-year yield breached 5% for the first time since 2007.
“The focus of the bond market has clearly shifted over the last two weeks back to the resilient US economy,” said Messi. “We would not sell longer-maturity bonds, but we would also wait for some stabilization before considering adding duration exposure again.”
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