U.S. bond yields rose Wednesday morning after data showed stubbornly high price pressures in the U.K., reviving inflation concerns.
What’s happening
-
The yield on the 2-year Treasury note
TMUBMUSD02Y,
4.284%
climbed to 4.242% from 4.197% on Tuesday. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.628%
rose to 3.611% from 3.571% as of Tuesday afternoon. -
The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.819%
advanced to 3.805% from 3.787% late Tuesday.
What’s driving markets
Data released on Wednesday showed that U.K. inflation is proving sticky, causing a broad selloff in government bonds that forced up yields.
The Office for National Statistics said consumer prices rose 10.1% year-over-year in March, down from 10.4% in February, though above economists’ forecasts for a 9.8% rate.
Benchmark 10-year gilt yields
TMBMKGB-10Y,
jumped 9 basis points to 3.841% as traders increased bets that the Bank of England will raise interest rates by another 25 basis points to 4.5% on May 11.
U.S. annual headline inflation, based on the consumer-price index, has fallen from a four-decade high of 9.1% last June, but remains well above the Federal Reserve’s 2% target, at 5% for March.
Markets are pricing in an 86% probability that the Fed will raise interest rates by another 25 basis points to a range of 5% to 5.25% on May 3, according to the CME FedWatch tool. The central bank is mostly expected to take its fed-funds rate target back down to between 4.5% and 4.75%, or lower, by December, according to 30-day Fed Funds futures.
The Federal Reserve’s Beige Book of economic anecdotes will be published at 2 p.m. Eastern time, and New York Fed President Williams is due to speak at 7 p.m.
What analysts are saying
Treasurys “were under pressure overnight in the wake of higher-than-expected U.K. inflation print,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery.
“As a result, the market is pricing in a higher probability that the Bank of England delivers another hike when the decision is made on May 11,” they wrote in a note. “The Treasury market traded weaker overnight in a sympathy move that brought 10-year yields as high as 3.635%.”
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U.K treasury yields rose on Friday after data showed surging prices that revived worries about inflation prompting investors to buy bonds.
The Office for National Statistics said the U.K. Consumer Price Index rose by 1.5 percent in February from January, well above analysts’ forecasts for a 0.4% increase. The 10-year U.K. bond yield jumped to its highest level since January.
The inflation surge threw into question the Bank of England’s view that the U.K. will soon experience a slowdown in consumer prices given the impact of coronavirus-induced lockdowns and weaker domestic demand due to Brexit-related disruption.
The inflation surge, which was driven solely by a 1.8% jump in food costs, could hint at further price rises to come. Indeed, fuel prices rose 4.5% on year as the cost of oil has risen sharply.
The renewed fears of inflation have ramped up the pressure on the Bank of England which is already being pushed by weak growth and Brexit uncertainties.
The central bank will be seeking to ensure price growth remains benign. However, given the uncertainty, investors are likely to remain cautious. With the economy expected to slow in the coming months, the Bank of England could be forced to act in the short term to ensure that inflation doesn’t rise any higher.
The bond market will be closely monitoring future inflation reports to get an indication of where consumer prices are headed and whether the Bank of England will have to intervene.
