The tense calm that has enveloped the U.S. bond market may burst in the next few days as anticipated data on consumer prices and jobs may provide additional insight into how long the Federal Reserve may need to maintain high interest rates in order to successfully combat inflation.
Cutting Interest Rates
Even while many have been compelled to reassess how far the Fed can cut interest rates without sparking inflation, investors are still expecting rate cuts this year. As a result, the market’s expectations for easing have become more in line with the central bank’s. Over the past few weeks, the range of yields on the benchmark U.S. 10-year Treasury, which are inversely correlated with bond prices, has shrunk.
When he told legislators on Wednesday that further success in reducing inflation “is not assured” even though the Fed still plans to lower rates in 2024, Fed Chairman Jerome Powell reiterated that stance.
If Friday’s employment statistics and next week’s consumer prices report demonstrate sustained economic momentum and increased inflation stickiness, further delaying expectations for Fed rate cuts, then bond investors’ situation could become further hazardous.
Increase In Consumer Price
Source: Yahoo Finance
Theoretically, this might raise yields and upset investors who had jumped into Treasuries in the previous few months on the expectation of an impending removal of restrictions.
With Powell’s remarks, the 10-year yield was essentially unchanged at 4.11% as of late. Since early February, yields have fluctuated between approximately 4.05% and 4.35%, after experiencing a sharp decrease from a 16-year peak of slightly over 5% in October 2023.
Reuters polled economists predict that the United States added 200,000 jobs in February, following a record-breaking 353,000 jobs in January. Anticipated from the March 12th U.S. consumer price data is a 0.4% increase in prices in February. In the preceding month, consumer prices increased at a rate that was quicker than anticipated—by 0.3%.
