Treasurys saw mixed trade Friday, leaving yields little changed after data showed core inflation hit the Fed’s 2% target for the first time in six years.
What are yields doing?The yield on the 10-year Treasury note TMUBMUSD10Y, +0.90% declined 0.2 basis point to 2.847%, while the 2-year yield TMUBMUSD02Y, +0.81% edged up 0.6 basis point to 2.528%. The yield on the 30-year Treasury bond TMUBMUSD30Y, +0.84% declined 0.5 basis point to 2.974%.
Yields and bond prices move in opposite directions.
What’s driving the market?The May personal-consumption expenditures, or PCE, index showed core inflation, which strips out food and energy, hit 2% over the past 12 months, matching the Federal Reserve’s long-run target for the first time since April 2012.
The Federal Reserve has delivered two rate increases in 2018 and has penciled in two more while continuing to wind down its balance sheet. Data points to a strong pickup in U.S. economic growth while momentum in the global economy stalls. Meanwhile, the Trump administration is in the midst of a trade fight with China and other major trading partners, with headlines providing bouts of haven-related flows that have helped to cap yields.
The 10-year yield topped 3% in May only to retrace some of the year’s rise. Still, the yield was up nearly 44 basis points through Friday, according to WSJ Data Group, marking the end of the second quarter and the first half of 2018. The 2-year yield, which is more sensitive to rate expectations is up 64 basis points year to date.
The sharper rise in yields at the short end has served to flatten the yield curve, raising alarm bells among investors who fear the phenomenon heralds an economic slowdown or recession, though analysts note that it’s an inversion of the curve, in which short-term yields rise above long-term, that has in the past served as a reliable precursor to recession.
Read: Here’s when the yield curve actually poses a danger to the stock market
What do analysts say?Meanwhile, analysts said the outlook for inflation and developments on the trade front will continue to be the main market drivers.
“The Fed is projecting that core inflation will not rise further from here, but we suspect that core inflation will continue to trend higher, as capacity constraints begin to bite. That will keep the pressure on the Fed to keep hiking rates once a quarter over the coming year or so,” said Michael Pearce, senior U.S. economist at Capital Economics, in a note.
“If equities continue to hemorrhage then there could clearly be a bullish story for some assets, like Treasurys and the dollar. However, as we have said before, tariffs are like a supply shock for the U.S. in the sense that they will tend to crimp growth and lift prices,” said Steve Barrow, currency and fixed-income strategist at Standard Bank, in a note. “These effects might be marginal but, on inflation at least, we know that even relatively small upside surprises can make the market panic.”
What data are on tap?In addition to the inflation reading, the PCE data showed consumer spending rose 0.2% in May, compared with expectations for a 0.6% rise. Personal income rose 0.4% after a 0.2% rise the previous month.
The Chicago purchasing managers index climbed to a reading of 64.1 in June, up from 62.7. Any reading above 50 indicates improving conditions. The final June reading of the University of Michigan consumer sentiment index came in at 98.2, below forecasts.
