US Treasury yields pause as investors await July inflation data
Benchmark US government borrowing costs remained unchanged on Wednesday as traders position for a consumer price index report that could dictate the Federal Reserve's next move on interest rates.
Yields on US government debt were largely unmoved on Wednesday morning. The benchmark 10-year Treasury note yield held flat at 4.682%, while the 30-year bond remained unchanged at 5.231%.
The 2-year note, which closely tracks short-term Federal Reserve policy expectations, also stayed put at 4.212%. Market participants are holding back from major positioning ahead of the July consumer price index release.
Economists surveyed by Dow Jones project the headline inflation rate will show a 3.4% annual increase and a 0.1% monthly gain. The core measure, which strips out volatile food and energy costs, is forecast to rise 0.2% month-over-month and 2.5% year-over-year.
These figures carry heavy weight for the central bank's September policy meeting. Policymakers are currently on an August recess but remain highly focused on how persistent pricing pressures are affecting American consumers.
The stakes for the September decision are already elevated after three officials dissented at the previous gathering. Those members voted in favor of raising interest rates to combat the inflation threat.
Keith Buchanan, senior portfolio manager at Globalt Investments, noted that the upcoming print will dictate market direction. "CPI does set the stage," Buchanan said. "Either it's as expected and contained or not and we'll start to see the long end shift higher."
ING strategist Padhraic Garvey noted that while higher yields are linked to the war and energy prices, the market discount for inflation remains quite relaxed. He expects the July reading to show core inflation at 2.5% year-on-year, but noted that break-evens are already trading below this level.
"Break-evens are already below this, paving an auspicious path ahead," Garvey wrote in a note. However, he warned that the fiscal deficit has been morphing in a more bond-negative direction.
Further clarity on pricing pressures will arrive on Thursday with the release of the July producer price index. That data follows a softer-than-expected wholesale inflation reading last month.
