Bond Report: Treasurys tread water as investors await key inflation report

Treasury yields held steady on Wednesday ahead of a report on consumer inflation that could deliver crucial clues about the pace of inflation, which in turn could dictate how quickly the Federal Reserve raises interest rates in 2018.

How are Treasurys are performing?

The 10-year Treasury note yield TMUBMUSD30Y, -0.16% was down 0.8 basis point at 2.829%. Yields for the 30-year bond TMUBMUSD30Y, -0.16% retreated by 1.4 basis points to 3.110%.

Meanwhile, the 2-year note yield TMUBMUSD02Y, -0.19% the most sensitive to shifting expectations for Fed policy, was little changed at 2.102%, after plumbing an intraday low of 2.065% on Tuesday.

Bond prices move inversely to yields.

What’s driving the market?

Bond traders, and the broader market, have homed in on coming inflation reports after the jobs report for January, signaled that inflation, which has bedeviled economists and investors for its absence during a healthy labor-market cycle, could be due to re-emerge. Average hourly wages for private-sector workers in January rose 2.9% from a year earlier, marking the largest such increase since June of 2009.

Inflation is a key economic measure in bond investing because rising inflation can erode the value of a bond’s fixed payments. Indications that inflation would remain subdued has held yields in check until recently.

Moreover, lower inflation has made the Fed reluctant to lift interest rates at a more rapid pace than the market expects. Wall Street is pricing in about three rate increases in 2018 but expectations could jump to a further one or two hikes if inflation is seen as surging more rapidly than anticipated.

On Tuesday, long-dated yields fell but the yields of short-dated maturities rose, narrowing the spread between those bonds. Short-term yields tend to climb on growing expectations for monetary tightening while long-term yields slip if investors feel the central bank’s hiking trajectory will squelch inflation down the road.

The inflation report

The January consumer-price index is slated to be released at 8:30 a.m. Eastern Time, with economists polled by MarketWatch are forecasting a 0.4% rise for CPI, along with a 0.2% rise for the core CPI, which strips out volatile food and energy costs.

What else is in focus?

Worries about rising budget deficits, amid a wave of fiscal-stimulus measures backed by President Donald Trump, are expected to drive up the government’s borrowing costs, which would likely result in investors demanding extra yield to compensate for the risk of holding Treasurys. Analysts at Credit Suisse estimated after the recent spending bill, debt servicing costs could eventually exceed 5% of GDP. Increased issuance also comes as the Fed continues to wind down its balance sheet, depriving the market of one source of price-insensitive demand.

What other assets are in focus

Signs of rising wages from the January jobs report are often blamed for sparking a selloff in global equities, with the Dow Jones Industrial Average DJIA, +0.16% S&P 500 index SPX, +0.26% and the Nasdaq Composite Index COMP, +0.45% slipped into correction territory, typically defined as a drop of at least 10% from a recent peak.

Anxieties spurred by rising borrowing costs as yields pitched higher were among the factors that helped push stocks lower, market participants have said.

Meanwhile, yields for the 10-year German bond TMBMKDE-10Y, -2.85% known as bunds, were at 0.731%, down compared with 0.747% in the previous session.

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