Shorter dated Treasury yields rose while longer dated maturities slipped early Wednesday, flattening the yield curve slightly ahead of a hotly anticipated May consumer price index reading.
What yields are doing
- The yield on the 10-year Treasury note TMUBMUSD10Y, 3.038% fell to 3.03% from 3.04% at 3 p.m. Eastern on Thursday. Yields and debt prices move opposite each other.
- The 2-year Treasury yield TMUBMUSD02Y, 2.862% rose to 2.85%, up from 2.815% Thursday afternoon, which was the highest 3 p.m. level since Dec. 3, 2018.
- The yield on the 30-year Treasury bond TMUBMUSD30Y, 3.153% was 3.149%, down from 3.169% late Thursday.
What’s driving the market
Inflation readings are front and center for financial markets as investors assess the Federal Reserve’s policy path and its ability to bring price pressures under control without triggering a sharp economic downturn. The May consumer price index is due at 8:30 a.m. ET.
April data showed the yearly CPI inflation rate fell for the first time in eight months to 8.3%. The prior 8.5% reading in March was the biggest since December of 1981.
See: U.S. didn’t get any relief from high inflation in May – CPI to show another big gain
The Fed, which also began shrinking its balance sheet this month, raised the fed-funds rate by 25 basis points, or a quarter of a percentage point, in March, followed by a half-point rise in May. Fed Chair Jerome Powell has said half-point hikes are on the table this month and in July, while investors have increasingly focused on the central bank’s September meeting.
The European Central Bank on Thursday signaled it will also begin tightening monetary policy, announcing it would end its quantitative easing program on July 1 and deliver a quarter-point rate increase next month. The ECB said it would lift rates by a half-point in September if inflation expectations remain the same or deteriorate.
See also: ECB could hike 50 basis points in September, says central bank’s Holzmann in first comments after meeting: report
What analysts say
“Today, the focus shifts to the U.S. inflation release, which is expected to report just a minor reduction in [year-over-year] momentum given another strong monthly increase. This does not bode well for the upcoming FOMC meeting, at which we expect another increase in the median dots,” wrote economists at UniCredit Bank, referring to the so-called dot plot that tracks rate forecasts from individual Fed policy makers.
“As things stand now, there are three trends that appear well established in the U.S. and the euro area. 1. Curves are likely to bear-flatten for the time being. 2. Market-based inflation expectations are not edging substantially higher despite realized inflation readings still surprising on the upside. The rationale is mainly the hawkish commitment of central banks to fighting inflation at any cost. 3. Real rates are edging higher on the back of inflation-committed central banks, which implicitly suggests that they are targeting higher real rates,” they wrote.