Treasury yields slip ahead of Wednesday’s CPI inflation data

What’s happening

• The yield on the 2-year Treasury
  TMUBMUSD02Y,
  4.906%
  eased 5.4 basis points to 4.877% from 4.931% on Friday. Yields move in the opposite direction to prices.

• The yield on the 10-year Treasury
  TMUBMUSD10Y,
  4.039%
  slipped 3 basis points to 4.017% from 4.047% as of late Friday.

• The yield on the 30-year Treasury
  TMUBMUSD30Y,
  4.050%
  fell less than 1 basis point to 4.028% from 4.032% Friday afternoon.

What’s driving markets

While 2- through 10-year rates were down as of Monday morning, 1-month through 1-year Treasury yields were higher as traders priced in a greater likelihood that the Federal Reserve’s main interest-rate target will stay between 5.25% and 5.5% from September through year-end.

The U.S. economy is showing little signs of being damaged by the central bank’s sharp tightening of policy over the past year or so. Data released on Friday indicated that a fewer-than-expected 209,000 jobs were created in June, though wage growth remained stubbornly higher.

The next major U.S. inflation update, the consumer price index report for June, is due on Wednesday. Economists polled by The Wall Street Journal said they expect the annual headline CPI rate to come in at 3.1%.

Read: Markets caught in ‘self-defeating feedback loop’ with Fed on inflation as June CPI looms

Markets are pricing in a 92.4% probability that the Fed will raise interest rates by 25 basis points to a range of 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.

In other developments on Monday, wholesale inventories were unchanged in May. In addition, Michael S. Barr, vice chair for supervision at the Fed, said he’s leading a multi-year effort to increase capital requirements for banks.

News that China’s consumer price inflation was flat on the year and factory gate prices tumbled in June appeared to have had little impact on the wider fixed income market on Monday.

What analysts are saying

“We look for core CPI inflation to take a step down … but caution that core inflation should prove sticky around 3%,” said JPMorgan Chase & Co. strategist Phoebe White, along with Liam Wash and Holly Cunningham.