U.S. Treasury yields have been somewhat seesawing as a multitude of factors impact the markets at the moment. The economy registered strong jobs growth in February, while wage growth has been soft.
Initially, Treasury yields scaled higher on strength in jobs data, only to fall following strong demand for government debt auctions. Widening budget deficits owing to President Trump’s tax reform and an increase in government spending have driven government debt issuance to record highs. Bond prices move inverse to bond yields.
What’s Moving Yields?
The U.S. economy added 313,000 jobs in February — the highest since July 2016 — compared with a Reuters forecast of 200,000. However, tepid wage growth reduced fears of an aggressive rate hiking spree by the Fed. Average hourly earnings in the United States grew a mere 0.1% in February compared with 0.3% in the previous month.
The jobs data strength overshadowed the weakness in wage growth and led to a rally in Treasury yields. However, this was short lived as yields declined after two auctions for government bonds received strong demand, with around $50 billion of notes sold on Mar 12. The Treasury Department auctioned $28 billion in 3-year notes at a yield of 2.436% and $21 billion in 10-year notes at a yield of 2.889%.
Per a Market Watch article, CME’s Fed watch tool predicts three rate hikes for the year and that there is a 35% probability of four hikes in 2018. The markets will be closely watching the U.S. inflation report due on Tuesday to gain more information on where interest rates might be headed. In case of inflation is way above market expectations, the probability of a greater number of rate hikes than earlier anticipated will increase.
“Tuesday’s core-CPI release will undoubtedly be the tone-setting event for the next several weeks in the Treasury market, or at least until the FOMC updates the dot-plot next Wednesday,” per a Market Watch article citing Ian Lyngen and Aaron Kohli, fixed-income strategists at BMO Capital Markets.