2-year Treasury yield dips as investors assess Canada’s cooling inflation

What’s happening

• The yield on the 2-year Treasury
  TMUBMUSD02Y,
  4.761%
  fell 6.7 basis points to 4.666% from 4.733% on Monday.

• The yield on the 10-year Treasury
  TMUBMUSD10Y,
  3.763%
  slipped 1.4 basis points to 3.705% from 3.719% Monday afternoon.

• The yield on the 30-year Treasury
  TMUBMUSD30Y,
  3.837%
  declined 2.1 basis points to 3.797% from 3.818% as of late Monday.

What’s driving markets

Data released on Tuesday showed that inflation in Canada cooled sharply in May to its slowest pace since mid-2021 as fuel prices fell. Canada’s consumer price index rose 3.4% in May from a year earlier, Statistics Canada said.

The data from Canada helped boost the case for a relatively quick drop in U.S. inflation this year, as expressed by traders of derivatives-like instruments known as fixings. Since early this year, they have been making the call that the annual headline rate on the U.S. consumer-price index is set to head toward the 2% level. Last week, top inflation traders said they were coalescing around the view that core readings, which matter most to Federal Reserve policy makers, are also set to fall in a matter of months.

In U.S. economic updates on Tuesday, durable-goods orders jumped 1.7% in May and rose for a third month in a row, boosted by demand for passenger planes and new autos. In addition, the S&P CoreLogic Case-Shiller 20-city house price index rose 0.9% in April, as compared to the previous month.

Earlier in the day, optimistic comments on the Chinese economy from the country’s premier helped create a slightly more risk-positive tone across global markets, which temporarily reduced demand for sovereign bonds and nudged Treasury yields higher.

The most important U.S. data of this week is likely to be Friday’s personal consumption expenditures price index for May, the Federal Reserve’s favorite inflation indicator.

Markets are pricing in a 74% probability that the Fed will raise its policy interest rate by 25 basis points to between 5.25%-5.5% on July 26, according to the CME FedWatch Tool. The central bank is not expected to take its fed funds rate target back down to around 5% until next year, according to 30-day Fed Funds futures.

What analysts are saying

“We expect sovereign yields in the U.S. and Germany to rise this week amid the Sintra forum [or European Central Bank’s forum on central banking in Sintra, Portugal], where central bankers will likely reinforce their resolution to fight inflation,” said strategists at Saxo.

“Our expectation is for the front part of the yield curves to resume its rise towards 5% in the U.S. and 4% in Germany while long-term yields remain underpinned by weak growth data,” they wrote in a Tuesday note.

See: IMF puts blame on greedflation for rise in prices