Monday, December 11, 2023

Treasury yields edge up following better-than-expected economic data

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U.S bond yields were slightly higher on Tuesday as traders returned from a three day holiday weekend a touch more optimistic about the global economy.

What’s happening
  • The yield on the 2-year Treasury

    rose by 2.1 basis points to 4.241%.

  • The yield on the 10-year Treasury

    added 4.5 basis points to 3.550%.

  • The yield on the 30-year Treasury

    climbed 5.2 basis points to 3.666%.

What’s driving markets

A batch of better-than-expected economic data from across the globe Tuesday helped push U.S. bond yields higher as investors returned to their screens following the Martin Luther King holiday.

First up was news that China’s economy grew 3% last year. Though this was the second weakest pace of expansion since the 1970’s, it was nevertheless better than analyst forecasts and raised hopes the world’s second biggest economy was more resilient than expected as it battled COVID.

Next, data out of the U.K, showed the labor market remained in relatively robust health, while a survey of German business sentiment on the economy jumped from minus 23.3 in December to 19.9 in January.

The building optimism about the European economy was reflected in comments from European Central Bank governing council member Mario Centeno, who told a panel in Davos that: “The economy has been surprising us quarter after quarter…The fourth quarter in Europe will be most likely still positive. Maybe we’ll be surprised also in the first half of the year.”

U.S. Treasury yields tracked their European peers higher, with the 10-year German bund adding 1 basis point to 2.183 and the U.K. gilt up 3.2 basis points to 3.419%.

U.S. data due for release on Tuesday include the Empire State manufacturing index due at 8:30 a.m. Eastern.

Markets are pricing in a 91.2% probability that the Federal Reserve will raise its policy interest rate by another 25 basis points to a range of 4.50% to 4.75% after its meeting on February 1st, according to the CME FedWatch tool. The central bank is expected to take its Fed funds rate target to 4.9% by June 2023, according to 30-day Fed Funds futures.

The Bank of Japan will deliver its monetary policy decision at 9:30 p.m. Eastern

What are analysts saying

“After trading near the cycle lows of late last year into 3.40% for the 10-year benchmark on benign inflation data last week and a series of very strong auctions for especially longer-dated US Treasuries, the 10-year yield rebounded toward 3.50% on Friday and traded slightly higher overnight after coming back from the long holiday weekend. The next US macro data point of note is perhaps tomorrow’s December retail sales release,” said strategists at Saxo Bank.

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