Two-year Treasury yields held above 5% but longer-duration yields eased further from recent highs as the market priced in interest rates staying higher for longer ahead of a busy week of economic data.
What’s happening
- The yield on the 2-year Treasury BX:TMUBMUSD02Y was barely changed at 5.008%. Yields move in the opposite direction to prices.
- The yield on the 10-year Treasury BX:TMUBMUSD10Y retreated 1 basis point to 4.197%.
- The yield on the 30-year Treasury BX:TMUBMUSD30Y fell less than 1 basis point to 4.273%.
What’s driving markets
Short-term U.S. bond yields are holding near 16-year highs after comments last week perceived as hawkish from Federal Reserve Chair Jerome Powell and as traders await a roster of economic reports through the week, including PCE inflation on Thursday and the nonfarm payrolls report Friday.
The policy-sensitive 2-year yield is holding around 5% — though the 10-year benchmark is easing back from recent cycle highs above 4.3% — as investors increase bets that the Fed will raise rates again this year and will keep such borrowing costs higher for longer.
Markets are pricing in a 79% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on Sept. 20, according to the CME FedWatch tool.
But the chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in November is priced at 50%, up from 30% a month ago.
Similarly, the central bank is not expected to take its Fed funds rate target back down to around 5% until August 2024, according to 30-day Fed Funds futures. Just a month or so ago rates were expected to be at that level by May.
U.S. economic updates set for release on Tuesday include the S&P Case-Shiller home price index for June, due at 9 a.m. Eastern, followed at 10 a.m. by the job openings, or JOLTS, survey for July and the August reading on consumer confidence.
The Treasury will auction $ 36 billion of 7-year notes on Tuesday.
What are analysts saying
“[T]he question of whether we get more hikes will partly be determined by this week’s data, with several important releases coming up,” said Henry Allen, strategist at Deutsche Bank.
“In the U.S., the main highlight will be the jobs report on Friday, where our U.S. economists expect nonfarm payrolls to have slowed further to +150k in August. That would be the slowest growth since December 2020, and they see that pushing the unemployment rate up a tenth to 3.6%.”
“One category we’ve been following closely is temporary help services, because that has traditionally been a strong leading indicator in previous cycles, turning down ahead of the overall number. It’s fallen for 6 months in a row now, so one to keep an eye on.” Allen added.