Treasury Yields Climb as Traders Seek Further Clues on Fed Path

(Bloomberg) -- Treasuries slipped as traders sought further guidance on the path of US interest rates following economic reports last week that muddied their assessment of price pressures.

The 10-year yield rose as much as four basis points to 4.52% as US trading restarted following Monday’s national holiday, climbing from its lowest closing level in a week and re-steepening the yield curve. Benchmark rates in Europe also increased for a second day amid concerns that more defense spending in the region will necessitate extra issuance.

The move in Treasuries follows a bumpy few days for investors, who were first whipped by hotter-than-forecast data on consumer prices before a report on producer prices eased concern that the US was careening toward a new cycle of higher inflation. Still, Federal Reserve Governor Christopher Waller on Monday added to expectations that rates will likely stay on hold for now, citing prices, as did Philadelphia Fed President Patrick Harker.

“The macro backdrop points to upside risks to US Treasury yields in the US,” said Benoit Anne, a managing director at MFS Investment Management. “In particular, we have a Fed that is being priced out, inflation risks that have resurfaced, and a growth picture which remains robust. In other words, the macro drivers that would help push rates lower have become a scarcity.”

San Francisco Fed President Mary Daly and Fed Vice Chair for Supervision Michael Barr speak Tuesday, while minutes from the central bank’s latest policy meeting will be released on Wednesday.

Money markets are currently pricing one quarter-point cut by the Fed in 2025, with roughly even odds of a second reduction.

“Treasury yields are firmer across the curve as Fed officials continue to signal they’re in no rush to resume easing,” said Elias Haddad, senior strategist at Brown Brothers Harriman.

The dip in US bonds also followed a larger slump in European securities on Monday, with the spread between German and Italian bonds tightening to the narrowest since 2021.

Officials from the US and Russia are meeting in Saudi Arabia to discuss how to end the war in Ukraine, with Europe rushing to articulate a plan to fund its own defense. Few details have emerged on new measures, leaving analysts and investors to debate the merits of further debt sales by sovereign states or the EU, and the impact this will have on the relative appeal of the region’s bond markets.