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Bond yields fell on Wednesday after cooler-than-forecast U.K. inflation bolstered the narrative that central banks will soon be done raising interest rates.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.734%
slipped by 3.4 basis points to 4.730%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.769%
retreated 2.7 basis points to 3.763%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.878%
fell 2.3 basis points to 3.876%.
What’s driving markets
Data from the U.K. showing consumer price inflation fell in June to a less-than-expected 7.9% — its lowest level in more than a year — sparked a dip in government bond yields across Europe and the U.S..
The news from Britain might not normally impact the wider market. But it was jumped on by global bond bulls as further evidence that inflationary pressures — though still high in the U.K.’s case — are waning in developed economies like the U.S., and this will help central banks to soon stop raising borrowing costs.
But not yet. Markets are pricing in a 99.8% probability that the Fed will raise interest rates by 25 basis points to a range of 5.25% to 5.50% after its meeting on July 26, according to the CME FedWatch tool.
However, the chances of further 25 basis point hike to 5.5% to 5.75% after the September or November meetings are 12% and 25% respectively.
The central bank is not expected to take its Fed funds rate target back down to around 5% until April 2024, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Wednesday include housing starts and building permits for June, due at 8:30 a.m. Eastern.
What are analysts saying
“Evidence is emerging that U.S. growth could hold up even though inflation does seem to be subsiding. Diminishing headwinds from monetary and fiscal policy tightening, strong consumer income growth, and an emerging bottom in the housing and manufacturing sectors suggest that positive growth impulses may overcome the drag from reduced bank lending in the months ahead,” said Stephen Innes, managing partner at SPI Asset Management.
“One key difference between this economic cycle and all that have preceded it since the 1970s is the role of supply in driving inflation. So a soft landing can not happen without the supply coming back. and the past month has provided notably better news on this front.”
“Measures of bottleneck inflation have not only unwound the entire spike from COVID but are now sitting at the lowest level since records began in the mid-1990s. And this is corroborated by other pipeline measures, such as China producer prices and the price component of the PMIs, which are also in deflationary territory,” Innes said.
