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Bond Report: 2-year Treasury yield hits highest since December 2018 as investors turn to Friday’s U.S. inflation reading

Most Treasury yields advanced on Thursday, led by shorter-end rates, as investors looked ahead to U.S. inflation data on Friday.

Meanwhile, the spread between 5- and 30-year yields shrank to as little as 9.6 basis points on the day in a potentially worrisome signal about the economic outlook.

What yields are doing

The 2-year Treasury note yield BX:TMUBMUSD02Y rose 4.3 basis points to 2.815% versus 2.772% Wednesday. That’s the highest 3 p.m. level since Dec. 3, 2018, according to Dow Jones Market Data.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.045%

rose 1.3 basis points to 3.041% from 3.028% at 3 p.m. Eastern on Wednesday. That’s the highest since May 9.

The 30-year Treasury bond yield
TMUBMUSD30Y,
3.170%

declined less than 1 basis point to 3.169% from 3.178% late Wednesday.

What’s driving the market

Most Treasury yields have pushed to the upside this week as investors await Friday’s U.S. May consumer-price index reading, with the focus on the outlook for economic growth and further rate hikes as the Federal Reserve attempts to rein in stubborn inflationary pressures.

Economists surveyed by The Wall Street Journal expect the year-over-year rate to slip to 8.2% from 8.3% in April. That would be down from a March reading of 8.5%, but still be elevated. The core reading, which strips out food and energy costs, is seen edging down to 5.9% year-over-year versus 6.2% in April.

However, fixings, or derivative-like instruments related to Treasury inflation-protected securities, or TIPS, imply that May’s year-over-year consumer-price index reading on Friday will come in hotter-than-expected and rise above March’s 40-year high in coming months.

Inflation-wary investors are also paying attention to oil prices, with Brent BRN00, -0.11% and West Texas Intermediate crude CL.1, -0.65% futures settling above $120 a barrel.

Key Words: Oil prices could go ‘parabolic’, putting global economy in ‘critical situation,’ says Trafigura chief

U.S. economic data released Thursday showed that new filings for unemployment benefits jumped by 27,000 last week to a five-month high of 229,000, but almost all of the increase appeared to be due to seasonal quirks tied to the Memorial Day holiday instead of rising layoffs. Economists polled by The Wall Street Journal had expected initial jobless claims to total 195,000 for the seven days ended June 4.

Meanwhile, the European Central Bank announced on Thursday that it will end monthly asset purchases on July 1 and likely lift key interest rates by a quarter of a percentage point next month as it vowed to bring surging inflation back to target. Policy makers also indicated a half-point hike was likely in September.

What analysts say

“Thursday’s curve dynamics reinforced one of our core tenets for the year: monetary policy makers will remain in the drivers’ seat unless and until risk assets come sufficiently off the rails,” BMO Capital Markets strategists Ian Lyngen and Benjamin Jeffery, wrote in a note.

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