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Bond Report: Treasury yields rise, 2-year hits highest since Dec 2018 ahead of Friday’s U.S. inflation report

Treasury yields edged up on Wednesday, with the 10-year maturity at around 3%, as investors assessed the outlook for inflation and economic growth ahead of May consumer-price index data on Friday.

What yields are doing

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.006%

was at 2.998%, up from 2.969% at 3 p.m. Eastern on Tuesday

The 2-year Treasury note
TMUBMUSD02Y,
2.737%

yielded 2.733%, little changed versus Tuesday afternoon.

The 30-year Treasury bond yield
TMUBMUSD30Y,
3.165%

was at 3.15%, up from 3.121% late Tuesday.

What’s driving the market

Treasury yields were back on the rise after mostly pulling back on Tuesday. The outlook for economic growth and inflation as the Federal Reserve tightens monetary policy remains front and center, with a Friday reading on the U.S. May consumer-price index expected to be the main event of the week.

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%, a more-than-40-year high, but still 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.

Fixings, or derivatives-like instruments related to the market for Treasury inflation-protected securities, or TIPS, imply that May’s year-over-year consumer-price index reading on Friday will come in at 8.5%, which would match the 40-year high hit in March. Fixings traders also see inflation climbing to 8.6% in June and July, before hitting 8.8% in August and September. October’s reading is seen at 8%.

The European Central Bank meets Thursday, with investors expecting policy makers to lay the groundwork to end asset purchases and begin lifting interest rates in July.

The Treasury Department will sell $33 billion in 10-year notes on Wednesday.

What analysts are saying

“The Fed is set to hike interest rates by 50bp at its meeting next week and to signal that a similar move is coming in July,” said Andrew Hunter, senior U.S. economist at Capital Economics. “We still think a drop back in inflation will allow officials to ease the pace of tightening later this year, but the recent strength of the activity and inflation data suggest the chances of another 50bp hike in September have risen.”

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