(Bloomberg) — Treasury yields soared, reaching new year-to-date highs, as hotter-than-expected March inflation readings prompted prompted investors to scale back the US interest-rate cuts they foresee this year.
The third straight higher-than-expected measure of underlying US inflation follows last week’s labor market data showing a blowout pace of job creation in March. For traders, the data adds to evidence that inflation — and the economy is running at levels that Federal Reserve officials may be uncomfortable with as they assess the timing of possible rate reductions this year.
Yields across the maturity spectrum were up by at least 8 basis points on the day, with the policy-sensitive two-year yield climbing as much as 23 basis points to 4.97%. The benchmark 10-year note’s topped 4.5% for the first time since November. As a result, the US dollar surged Wednesday — helping drive the yen to weaken through the closely watched level of 152 per dollar.
“That’s the sound of the door slamming shut on a June rate cut,” David Kelly, chief global strategist at JPMorgan Asset Management, said on Bloomberg TV. “It’s definitely more inflation than the Fed wants.”
Nearly everyone — from Wall Street strategists to Fed officials themselves — is now being forced to, once again, reckon with signs of economic resilience and sticky consumer price pressures that stand to affect the path ahead for US monetary policy.
Swap contracts that predict decisions by the US central bank repriced to higher rate levels, with the December contract’s reaching about 4.90% — only about 40 basis points lower the effective federal funds rate of 5.33%. Options traders added bets on the Fed cutting just one time this year.
In the wake of the CPI data, Bloomberg Economic Anna Wong and Stuart Paul pushed back their expectations for a first Fed rate cut to July from a previous baseline of June.
“Bottom line is that this data means for the Fed there will be one or two cuts at most this year, and right now they just have to be patient,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “Generally, the trend in yields is still higher, and we don’t want to fight the trend. But I’m not in the camp that we will make it to 5% in the 10-year.”
The Treasury yield increases were the biggest in months. Those for two- to 10-year yields exceeded the biggest ones so far this year as rates plowed upward. Yields on five-year Treasuries exceeded those on 30-year bonds for the first time since September.
Fed policymakers have said that while they expect to cut rates this year, they want to be more confident that inflation is on a sustainable path toward their 2% target before beginning the process. The rate they target — different from the CPI — was 2.45% in February, down from a peak of 7.1% in 2022. The March CPI readings provide scant basis for increased confidence in the trend.
Read More: US Core CPI Tops Forecasts Again, Likely Delaying Fed Rate Cuts
Traders face more potential volatility as the US Treasury plans to sell 10-year notes in an auction at 1 p.m., and several Fed speakers are on the docket along with the release of the minutes from the US central bank’s March policy meeting at 2 p.m. New York time.
The surge in Treasury yields means that the auction will raise less money for the US government. The auction is a reopening, meaning that the notes being sold will carry the same 4% fixed interest rate and mature on the same date as existing 10-year notes. Because investors now are demanding a 4.5% rate of return over 10 years, the market price for a 4% fixed interest rate — the price the government will get for the new notes at auction — has fallen to about 96 cents on the dollar.
Ahead of the CPI data, sentiment was running high in some quarters that it would restore the prospect of more than two rate cuts this year. As of this week, banks including Barclays, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley were still predicting at least three cuts, with the first one coming in June. Traders all but abandoned wagers on a June cut after the data.
At the start of the year, the amount of easing priced in for 2024 exceeded 150 basis points. That expectation was based on the view that the US economy would slow in response to the Fed’s 11 rate hikes over the past two years. Rather, growth data has broadly exceeded expectations.
“Seems like this will solidify the idea of high-for-longer and keep upward pressure on rates in the near term,” said Zachary Griffiths, head of US investment grade and macro strategy at CreditSights. “From a longer-term perspective we think this back up in rates presents an opportunity to add duration at attractive levels.”
–With assistance from Edward Bolingbroke, Kristine Aquino and Nazmul Ahasan.
(Adds comments and updates yield levels.)
https://finance.yahoo.com/news/yields-soar-traders-price-just-125150764.html
