2-year Treasury yield slips to almost two-week low ahead of Wednesday’s CPI data

What happened

• The yield on the 2-year Treasury
  TMUBMUSD02Y,
  4.859%
  declined 6.9 basis points to 4.862%, from 4.931% on Friday. Monday’s level is the lowest since June 28, according to 3 p.m. Eastern time figures from Dow Jones Market Data. Yields move in the opposite direction to prices.

• The yield on the 10-year Treasury
  TMUBMUSD10Y,
  3.999%
  slipped 4.1 basis points to 4.006%, from 4.047% as of late Friday.

• The yield on the 30-year Treasury
  TMUBMUSD30Y,
  4.032%
   rose 1 basis point to 4.042%, from 4.032% Friday afternoon.

What drove markets

Two- through 10-year Treasury yields fell on Monday as traders factored in the possibility that Wednesday’s consumer-price index report may include signs that U.S. inflation eased further last month.

Economists polled by the Wall Street Journal said they expect the annual headline CPI rate to come in at 3.1% for June, down from 4% in the prior month. They also see the narrower core gauge easing to 5% year over year, versus 5.3% previously.

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

On Monday, fed-funds futures traders priced in a slightly greater likelihood that the Federal Reserve’s main interest-rate target will stay between 5.25% and 5.5% from September through year-end, after factoring in a quarter-point July rate hike.

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

Policy makers remained resolute on Monday about their inflation-fighting campaign. Cleveland Fed President Loretta Mester said the central bank needs to raise interest rates further to ensure inflation is “on a sustainable and timely path back to 2%.” Her colleague, Mary Daly of the San Francisco Fed, said that “a couple” of additional rate hikes are likely needed this year, and that inflation is slowing but remains too high.

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 multiyear effort to increase capital requirements for banks.

What analysts are saying

“The postponement of U.S. recession risk has induced investors to abandon recession trades, especially negative carry recession trades in the fixed income space,” said JPMorgan Chase & Co. strategists led by Marko Kolanovic.

“The result is that, outside of commodities, markets now broadly price a low probability of recession, while our base case remains that a U.S. recession is likely to begin near year-end,” they wrote in a note. “This benign and complacent pricing of recession risk, along with increasing signs that a credit cycle is emerging, makes us turn more negative on corporate bonds and more positive on government bonds.”