Bond Report: Treasurys see buying as inflation fears subside and tariff concerns intensify

Treasury prices rose, pushing yields lower, Wednesday as moderating inflation fears shifted investor attention back onto an already expected rate hike by the Federal Reserve next week and away from expectations that the central bank could hike more aggressively this year.

Investors also highlighted German Chancellor Angela Merkel’s comments suggesting she was pessimistic over the eurozone’s ability to negotiate an exemption from the steel and aluminum import tariffs.

How are Treasurys performing?

The 10-year Treasury note yield TMUBMUSD10Y, -0.86%  rose 3.3 basis points to 2.815%, according to Tradeweb data, while the 30-year bond rate TMUBMUSD30Y, -1.33% known as the long bond, shed 4.3 basis points to 3.058%. The two-year note yield TMUBMUSD02Y, +0.54%  was mostly unchanged at 2.260%.

Bond prices and yields move in the opposite direction.

What drove trading in government bonds?

Inflation expectations have moderated after a string of milder-than-expected economic data has plumped up longer-dated bonds, pushing their yields lower. At the same time, investors are expecting a rate hike on March 21, lifting the shorter-dated yields that are more sensitive to Fed action. The fed-fund futures market, where traders can make bets on the course of coming interest rates, reflected an 88.8% chance of a 0.25 percentage point rate hike, CME Group data show.

See: ‘Benign inflation’ should stave off a bear market in bonds, says IIF

Read: Fed watchers scoff at speculation of half-point rate hike next week

Government-bond rates have mostly drifted higher this week but have been held in check around 2.90%, but the climb in yields has drawn questions about whether a bull market in Treasurys, which have prospered amid easy-money policies, could be coming to an end.

Treasurys received another leg up after a flare-up in tariff concerns. Merkel said she was unsure if Europe could successfully negotiate an exemption from the U.S.’s import duties.

Meanwhile, late Tuesday, Reuters reported that the White House was looking at imposing up to $60 billion in tariffs in Chinese goods, according to Reuters. The move would come after President Donald Trump imposed duties on aluminum and steel imports last week.

See: Angela Merkel begins 4th term as German Chancellor after most complicated coalition-building since WWII

What are strategists and traders saying?

“How bad could a bond bear market be for fixed income investors? We pulled 9 decades of 10-year Treasury returns and CPI inflation data to answer that question,” wrote Nick Colas and Jessica Rabe, market analysts at DataTrek Research, wrote in a Wednesday research note.

“The bottom line: as long as markets feel the Federal Reserve is competently addressing inflationary pressures, bond bear markets only last 12-24 months. The risk, however, is that yields are so low that even a modest bear market will create outright losses, rather than just seeing Treasurys lag inflation,” the analysts wrote.

Which data were in focus?

Retail sales fell 0.1% in February compared with a 0.3% forecast from economists polled by MarketWatch. That marks the third decline a row, a record last matched in 2012.

The producer-price index rose 0.2% in February, slightly above economists’s expectations of 0.1%. Analysts expected the wholesale price reading to moderate from a hot 0.4% in January.

Which other assets were worth watching?

The German 10-year government bond yield TMBMKDE-10Y, -3.51%  was at 0.591% on Wednesday, compared with 0.617% late Tuesday. German bonds, also known as bunds, are often viewed as a proxy for the health of the eurozone.

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