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Two- and 10-year Treasury yields jumped to three-month highs on Tuesday, after the May consumer price report showed the annual core rate of inflation still running above 5%.
What happened
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.683%
climbed 10.4 basis points to 4.694% from 4.590% on Monday. Tuesday’s level is the highest since March 9, based on 3 p.m. Eastern time figures from Dow Jones Market Data. The yield is up four of the past six trading days. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.827%
rose 7.4 basis points to 3.838% after factoring in re-opening levels. That’s also the highest level since March 9. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.928%
advanced 3.6 basis points to 3.941% from 3.905% late Monday. The yield is up for three consecutive trading sessions.
What drove markets
Data released on Tuesday showed consumer prices rose a scant 0.1% in May — held in check by cheaper gasoline — and that the yearly rate slowed to 4% from 4.9% previously, marking the lowest level since March 2021.
However, the so-called core rate, which strips out food and energy to provide a purer read on inflation, rose a stiff 0.4% for the third month in a row and came in at 5.3% for the past 12 months versus 5.5% previously.
As a result of the report, the likelihood that the Fed will skip another rate hike on Wednesday was seen as a virtual certainty. Markets are pricing in a 94.2% probability that the Fed will leave its main policy interest-rate target unchanged between 5%-5.25% after its meeting ends tomorrow, according to the CME FedWatch tool.
The chance of a 25-basis-point hike in July jumped slightly to 60.6% from 59.9% a day ago, with some analysts warning that the Fed may be forced to resume rate hikes again.
See also: Will stocks rally if Fed pauses interest-rate hikes? Here’s what historical data show.
What analysts are saying
“Both ‘headline’ and ‘core’ inflation were ‘as advertised’ and thus the Fed is clear to skip and assess. Still, some elements of the inflation report suggest some stickiness remains and thus a pivot remains increasingly unlikely,” said George Mateyo, chief investment officer of Key Private Bank.
“Headline inflation rose 0.1% for the month, helped by falling energy prices. This translates into a year-over-year increase of 4.0% which is the smallest increase in over two years. This will provide sufficient air cover for the Fed to pause in raising interest rates this month, exactly what the markets are hoping for,” Mateyo wrote in an email.
