US yields tick higher as market awaits Powell, inflation data
By Davide Barbuscia
NEW YORK, July 8 (Reuters) -U.S. Treasury yields ticked higher on Monday on profit taking after declining late last week, with investors now waiting for June inflation data and guidance from the U.S. central bank to assess the next moves for government bonds.
Yields, which move inversely to prices, fell on Friday after closely-watched jobs data showing the U.S. labor market is weakening, which strengthened expectations that the Federal Reserve will begin to cut interest rates in September.
The release on Thursday of the June Consumer Price Index (CPI) could inject more optimism among bond investors about a possible central bank's shift to a less restrictive stance as soon as September, if it comes within expectations.
Meanwhile, Fed Chair Jerome Powell's testimony in front of the Senate on Tuesday and the House on Wednesday could give investors more clues on the likely direction of interest rates, with some expecting Powell to strike a relatively dovish tone in light of recent data, and after a speech last week when he said the U.S. economy is back on a disinflationary path.
"You've had some less than favourable economic data so I think, while he's not going to be over the top dovish, he'll be more dovish than he is hawkish in my opinion, and then we'll see what CPI brings," said Tony Farren, managing director at Mischler Financial Group.
Developments around the U.S. presidential elections could also move the government bond market going forward, as pressuremounts on President Joe Biden to withdraw his re-election bid.
Long-term Treasury yields rose after Biden's shaky performance against Republican rival Donald Trump in the first presidential TV debate last month, as investors anticipated higher fiscal deficits and inflationary policies under a potential second Trump presidency.
"Investors' response to a new candidate from the Democrats is uncertain and likely contingent on the individual," BMO Capital Markets strategists said in a note.
"That being said, as demonstrated by the recent price action, an increase in the probability that Trump retakes the White House has been a bear steepener in Treasuries, suggesting the opposite will be true in the event the Democrats put forward a different contender," they wrote.
The probability of a 25 basis point Fed rate cut in September stood at 72.6% on Monday, with traders of futures contracts tied to the Fed policy rate betting on a total of just over two 25 point cuts for the whole of 2024.
Benchmark 10-year yields US10YT=RR were last at 4.282%, about one point higher than on Friday. Two-year yields US2YT=RR, which are more directly linked to changes in monetary policy expectations, were at 4.618%, up slightly from 4.599% on Friday.
A closely watched part of the U.S. Treasury yield curve measuring the gap between 10- and two-year yields, seen as an indicator of economic expectations, was at a negative 33.6, a slightly deeper curve inversion than on Friday.
Reporting by Davide Barbuscia; editing by David Evans
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