Two-year Treasury yield edges up to 4.08%, the highest in a week, as traders eye inflation data due Friday

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The policy-sensitive 2-year Treasury yields edged higher for a third straight session on Wednesday as investors waited for U.S. inflation data at the end of the week.

What’s happening
  • The yield on the 2-year Treasury
    gained 1.8 basis points, climbing to 4.078%, the highest since March 21, according to Dow Jones Market Data.

  • The yield on the 10-year Treasury
    edged 1 basis point lower to 3.565%, drifting lower from its 4.072% 1-year high on March 2.

  • The yield on the 30-year Treasury
    was less than a basis point lower at 3.777%.

What’s driving markets

The policy-sensitive 2-year Treasury yield edged higher for a third session in a row Wednesday from a day ago as traders waited for inflation data on Friday to help gauge the path of Federal Reserve policy on interest rates.

February’s PCE inflation report, one of the price gauges most closely watched by the Fed, is due on Friday.

“Overall, we expect some moderation in the monthly PCE inflation numbers but at a rate that still remains too high,” said Alex Pelle and Steven Ricchiuto, economists at Mizuho Securities, in a Wednesday client note.

Markets were pricing in a roughly 61% probability that the Fed will leave its policy rates unchanged at a range of 4.75% to 5.0%, and keep them there, after its meeting on May 3, according to the CME FedWatch tool.

See: ‘One or done’ scenarios seem likely for the Fed, economists say

In economic data, the focus was on more upbeat data for the housing market. Contract signings on U.S. homes rose for the third month in a row, with pending-home sales climbing 0.8% in February, according to the monthly index from the National Association of Realtors. Demand for mortgages also rose 2.9% in the latest week, as rates dropped for the third consecutive week. 

What are analysts saying

“The economic impact of recent banking stress is highly uncertain and rate markets removed about six hikes from the expected fed-funds rate priced into the December 2023 FOMC meeting,” wrote BofA Global’s rates and currency research team on Wednesday.

Their forecast, given a “shallow easing trajectory” by the Fed is a 2-year Treasury rate around 4.75%. Their 10-year rate forecast is 3.25% at the end of 2023, with downside risk to their forecasts if the credit cycle turns.

“The withdrawal of yields from their highs is likely to continue as the Fed nears the end of the tightening cycle,” wrote Peter Cardillo, chief market economist at Spartan Capital, in a daily client note on Wednesday. “In fact, with recession on the horizon, yields are likely to move lower. We therefore restate a 3.25% yield factor for ten year TSY bond’s in the intermediate short-term.”

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