Treasury Yields Rise for 2nd Session

The yield on the 10-year US Treasury note climbed toward 4.1% on Thursday, rising for the third consecutive session as strong US economic data and hawkish signals from the Fed lifted yields. Minutes from the Fed’s last meeting showed policymakers were split on the trajectory for US rates, with several participants favoring language that would have explicitly left open the option of raising the federal funds rate if inflation remained above target. Traders slightly trimmed expectations for Fed rate cuts this year but still see two 25 bps reductions before year-end. Recent data also highlighted robust US activity, with industrial production posting its largest increase in nearly a year, core capital goods orders surpassing forecasts, and housing starts reaching a five-month high. Investors now look ahead to jobless claims, PCE inflation, and GDP reports for further guidance on the rate outlook. Meanwhile, the Treasury Department’s $16 billion sale of 20-year bonds saw weak demand.

The yield on the 10-year US Treasury note rose to 4.09% from the over-two-month low of 4.04% touched on February 16th as minutes from the Federal Reserve's last meeting reflected a stronger hawkish rhetoric by the FOMC. Many policymakers indicated that the disinflation process for consumer prices may take longer than expected, warranting a longer wait before the restart of rate cuts. CPI inflation was below expectations at 2.4% in the last release, which was after the Fed's January meeting, but remained firmly above the 2% target for the Fed, which was last seen five years ago. Multiple FOMC members also noted that a rate hike may be necessary to tame inflation, underscoring the divide within the committee. Meanwhile, longer maturity bonds were pressured by the possibility that incoming Fed Chairman Kevin Warsh may vouch for a smaller balance sheet, aligned with his previous protests against quantitative easing during the global financial crisis.

The yield on the US 10-year Treasury note rose nearly 2 basis points to 4.08% on Wednesday, marking its first back-to-back increase since the start of the month, as investors digested strong economic data and awaited the release of the FOMC minutes later in the day. December housing starts and building permits exceeded forecasts, signalling improved builder confidence at year-end. Meanwhile, durable goods orders fell less than expected, and core capital goods orders rose a stronger-than-anticipated 0.6%. Investors are also looking to the minutes from the Fed’s January meeting for further insight after policymakers struck a more hawkish tone. Money markets are currently pricing in 57 basis points of rate cuts this year, equivalent to two quarter-point reductions and roughly a 30% chance of a third.