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Bond Report: Treasury yields mostly higher, led by 10-year, as U.S. wholesale prices data keeps inflation in focus

Treasury yields were mostly higher on Thursday after the latest U.S. wholesale prices report exacerbated inflation worries, though remarks by one Federal Reserve official prompted traders to pull back on the idea of a 100 basis points interest rate hike in two weeks.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
3.119%

was unchanged at 3.142% relative to Wednesday’s level. The 2-year yield is up 241.2 basis points year-to-date.

The yield on the 10-year Treasury
TMUBMUSD10Y,
2.953%

advanced 5.3 basis points to 2.957% from 2.904% late Wednesday.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.097%

rose 3.5 basis points to 3.103% after factoring in reopening levels.

What’s driving markets

Data released on Thursday showed that U.S. wholesale prices surged in June, signaling that inflation spread deeply into the economy. The increase in wholesale prices over the past 12 months rose to 11.3% from 10.9%, the government said. Just a year and a half ago, prices were rising at a less than 2% pace. On a monthly basis, the cost of wholesale goods and services jumped 1.1% in June.

Fixed income traders were still trying to absorb the U.S. June consumer prices data, released on Wednesday, and what that means for monetary policy. The reading of 9.1% percent in June was higher than forecast and showed inflation running at its fastest pace in almost 41 years.

Hopes that inflation had peaked were dashed, and the market initially responded by recalibrating its expectations in the direction of a more aggressive rate hike by the Federal Reserve in two weeks. However, Thursday’ s comments by Fed Governor Christopher Waller, who said he supports a 0.75 percentage point interest rate hike later this month but left the door opened for a larger move, prompted traders to dial back their views.

Markets are now pricing in a 45% probability that the Fed will raise its benchmark interest rate by 100 basis points to a range of 2.5% to 2.75% at its July 26-27 meeting. That’s down from 80% on Wednesday, though higher than where it stood on Tuesday, at 7.6%, according to the CME FedWatch Tool.

Determining precisely when the Fed last hiked by 100 basis points is difficult because it was during a time when the central bank wasn’t publicly announcing such moves. According to data from LHMeyer in Washington, a research firm led by former Fed governor Larry Meyer, though, the Fed hiked twice by 100 basis points in September 1980, and delivered 200 basis point and 300 basis point hikes later that year.

Meanwhile, concerns are building that the Fed’s monetary tightening could push the U.S. economy into recession, with the 2-year/10-year spread remaining below zero.

What analysts are saying

“The Fed’s guidance in June was that the July decision would be between 50bp and 75bp. The problem is that the Fed had guided to 50bp for June and then went 75bp instead. So guidance doesn’t seem to be worth the paper it’s written on,” said Stephen Innes, managing partner at SPI Asset Management.

“Rates volatility is increasing as investors are stuck trying to figure out the new normal for central bank policy. Not so long ago, it was 25 basis points, and now, as the Bank of Canada opted [on Wednesday] for 100 basis points in one go, no one seems to know,” Innes added.

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