(Bloomberg) — Treasury yields rose further — with some reaching year-to-date highs — ahead of inflation data comprising the market’s next test after a string of Treasury auctions went off without a hitch.
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Focus is shifting to January’s inflation reading on Tuesday after buyers snapped up more than $120 billion of bond issuance this week, including a record $42 billion 10-year auction. Despite the large supply, the bonds were awarded at a higher price than market rates going into the auction, a sign that the highest yields in months are proving adequate.
Evidence that inflation eased further at the start of the year will be a balm to Treasuries, which sold off sharply this month as surprisingly strong economic data forced traders to recalibrate bets on the timing of the Federal Reserve’s first interest rate cut.
Yields rose further on Thursday even after the day’s auction drew plenty of demand, and extended the move in early Friday dealings, with two- and five-year yields climbing about three basis points to their highest levels since Dec. 13. Longer-maturity yields rose less.
Economists surveyed by Bloomberg expect the year-on-year inflation figure to drop to 2.9% in January, from 3.4% the previous month, which would be the lowest level since early 2021. Prior to this release are the annual revisions to monthly US inflation data, due later Friday.
“Up to this point, the narrative of moderating inflation has not been challenged, and in this light, next week’s CPI report carries some risk,” said Mark Dowding, chief executive officer at RBC BlueBay Asset Management. Surveys showing an increase in wages and prices paid suggest “policymakers can’t afford to become too complacent.”
Investors are mindful of last year’s annual CPI revisions, when changes to the index — typically small and therefore ignored — were large enough to cast doubt on overall inflation progress.
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“The revisions could be short-term pivotal in terms of market rate expectations,” said Marc Ostwald, chief economist & global strategist at ADM Investor Services. The most important aspect will be where the 10-year real yield ends up after the revisions, which is “the key to Fed thinking on whether rates are becoming ‘overly restrictive’.”
–With assistance from James Hirai.
(Updates yield levels.)
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