US Bond Yields Rally Further Ahead of a Major US Inflation Report
US Bond Yields Rally Further Ahead of a Major US Inflation Report
The Federal Reserve is still aggressively raising short-term interest rates in an effort to bring inflation under control and keep the economy from falling into recession. That has pushed long-term yields on 10-year Treasury notes up from just above 1.5% at the end of 2021.
However, with inflation easing from its early-summer highs, investors are beginning to question whether the Fed is making progress and whether it may have to raise interest rates further than previously expected. That could lead to a broader sell-off of bonds, which would push longer-term yields even higher than they already are.
That’s one of the reasons why investors have been dumping Treasuries, which are also known as “fixed income.” When they sell bonds, the price drops and yields rise. That has pushed US 10-year Treasury yields up from just above 1.5% at the end last year to 3.8% this morning, which is above recent lows in the fixed-income market.
This has helped drive up the cost of borrowing, which is a key driver of consumer spending in a strong economy. A weaker dollar, which has been hammered by economic turmoil in the UK and Europe, has also played a role in pushing up US bond yields.
On the positive side, there are several indicators that indicate a weaker-than-expected inflation report Tuesday will not halt the Fed’s interest rate hikes. For one, the core CPI inflation measure, which excludes volatile food and energy prices, is showing a slowdown from its July peak of 8.5%. This is a good sign that the Fed will be able to tame inflation without overdoing it and pushing markets into recession, according to Bank of America economist Brian Swonk.
The core index showed a 0.3% month-over-month gain and 5.6% year-over-year increase in January, matching Wall Street’s expectations. That’s down from a 7.2% pace in December and the lowest level in 14 months.
Excluding the two major categories of inflation, the more closely followed PCE index also rose a modest 0.3% month-over-month and 4.4% year-over-year. That’s slightly down from a 0.6% gain in November and is the slowest pace since April.
As the economy strengthens, the core PCE index should gradually tame inflation while keeping the overall CPI trend strong. That should help the Fed avoid a worst-case scenario that would send the economy into recession and plunging oil and commodity prices.
While the latest reports have shown a slowing in the core and overall CPI inflation, the producer price index, which tracks the cost of raw materials, soared to its highest level in nine years last month. This reflects the strength of labor-market data, including strong job growth and wage gains. It’s a harbinger of a stronger-than-expected economy and is a key reason why the Fed has raised interest rates eight times in 11 months.