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TREASURIES-Yields rise as investors await Wednesday’s inflation data

·3 min read

(Adds three-year auction results, updates prices) By Karen Brettell NEW YORK, Aug 9 (Reuters) - U.S. Treasury yields edged higher on Tuesday as investors waited on highly anticipated inflation data on Wednesday, which will be scrutinized for how aggressively the Federal Reserve might continue to raise interest rates. Yields have risen off four-month lows reached last week as investors adjust for the likelihood that the U.S. central bank will remain hawkish, rather than pivot to a slower pace of rate increases as some had expected after the Fed’s July meeting. Employment data on Friday showing that U.S. job growth unexpectedly accelerated in July, and the level of employment rose above its pre-pandemic level, boosted these hawkish expectations. “A couple of weeks ago the market buzz was about pricing in cuts at some point, talking about pausing ... but then you get this really strong payroll number and it seems like sentiment really shifted very significantly,” said Thomas Simons, a money market economist at Jefferies in New York. Inflation data on Wednesday may provide more insight into whether the Fed is likely to hike rates by another 75 basis points in September. The Consumer Price Index (CPI) is expected to show that prices rose at an 8.7% annual pace during July, according to the median estimate of economists polled by Reuters, which would be a drop from June’s increase of 9.1%. “It’s likely that the 75 basis point talk for September could calm down when we see the CPI data,” said Simons. “Even if it comes in on consensus it represents pretty significant slowing in inflation growth.” Fed funds futures traders are now pricing for a 70% chance of a 75 basis points rate increase in September, and a 30% chance of a 50 basis points hike, and for the fed funds rate to rise to 3.68% by March, from 2.33% now. Benchmark 10-year note yields rose to 2.799% on Tuesday and are holding just below the 2.869% level reached on Friday, which was the highest since July 22. Two-year yields were last 3.286%, after reaching 3.331% on Friday, the highest since June 16. The yield curve between two-year and 10-year notes was at 49 basis points, the deepest inversion since 2000. The Treasury saw solid demand for a $42 billion sale of three-year notes on Tuesday, the first sale of $98 billion in new coupon-bearing supply this week. The notes sold at a high yield of 3.202%, less than a basis point below where they had traded before the auction. Demand was 2.50 times the amount of debt on offer, the most since May. The U.S. government will also auction $35 billion in 10-year notes on Wednesday and $21 billion in 30-year bonds on Thursday. Data on Tuesday showed U.S. worker productivity fell sharply in the second quarter and on an annual basis posted a record decline. August 9 Tuesday 3:05PM New York / 1905 GMT Price Current Net Yield % Change (bps) Three-month bills 2.58 2.6332 -0.021 Six-month bills 3.055 3.146 0.008 Two-year note 99-117/256 3.2862 0.070 Three-year note 99-98/256 3.222 0.076 Five-year note 98-240/256 2.9814 0.070 Seven-year note 98-68/256 2.9015 0.050 10-year note 100-164/256 2.7993 0.036 20-year bond 100-8/256 3.2476 0.030 30-year bond 97-104/256 3.0074 0.009 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 25.75 -0.50 spread U.S. 3-year dollar swap 8.50 1.00 spread U.S. 5-year dollar swap 2.50 -0.50 spread U.S. 10-year dollar swap 4.75 -0.25 spread U.S. 30-year dollar swap -29.75 1.00 spread (Editing by David Holmes and Josie Kao)