Yields Increase As Market Costs Reflect Tighter Fed Policy Following CPI

Following the publication of the most recent consumer price index data on Tuesday, U.S. Treasury rates increased, reflecting market anticipation of a Federal Reserve with tighter monetary policy. The Labor Department said on Tuesday that headline prices rose 0.5% month-over-month in January after rising 0.1% in December. Meanwhile, core prices increased by 0.4% on a monthly basis. Both results were in line with what economists surveyed by Reuters had predicted. Putting markets on notice that borrowing costs may ultimately need to go higher than is now widely expected, two U.S. central bank officials indicated on Tuesday that the Fed will need to keep gradually boosting interest rates to battle inflation. According to Thomas Barkin, president of the Richmond Fed, “inflation is stabilizing but it’s coming down slowly.” “I just believe there will be a lot more inertia and tenacity to inflation than perhaps we’d all prefer,” the author said. Interest rate futures traders now predict that the Fed will increase borrowing costs three more times, bringing the policy rate above the previously anticipated 5.1% by December and into the range of 5.25%-5.50% by July. Tim Schwarz, portfolio manager at Ninety One, declared that “the premise that there would be major disinflation and a concomitant need to pull back on tightening rate policy has unwound.” It was essentially a sideways print in the end, he added, but one that “corroborates the path of rising rates farther into the year.” The benchmark 10-year note yield increased to 3.760%, its highest level since January 3, as a result of market expectations that the Fed will maintain higher interest rates for longer. Since early November, the two-year yield has increased to 4.624%. The two-year is particularly vulnerable to predictions regarding rate movement. Tom di Galoma, managing director and co-head of rates trading at BTIG, gave his immediate assessment of the situation, saying that the number, in his opinion, is larger than what the market anticipated. Disinflation has altered somewhat in this area, he said. This simply gives the Fed justification to adopt a more hawkish tone in their statements. After inverting as far as minus 88 basis points the previous week, the yield curve between two-year and 10-year notes inverted even more on Tuesday, reaching minus 86.3 basis points. Prior to the release of the CPI report, the Fed’s Senior Loan Officer Survey on Monday suggested that credit conditions were becoming more restrictive because the most recent quarter’s results showed that banks were still tightening their lending standards even though spreads were getting closer together. After the announcement of January retail sales volume on Wednesday, the following significant data point will be available. A Reuters survey of economists predicts that this will show retail sales rising 1.6% in January after dipping 1.1% in December. The Commerce Department will publish information on personal consumption expenditures and income on February 24. Following less than anticipated demand for the auctions last week, the Treasury Department will sell $36 billion in 17-week bills on Wednesday. Additionally, it will offer $60 billion in eight-week notes and $75 billion in four-week bills on Thursday. Tuesday, February 14 at 2:37 PM (New York) and 1937 GMT Price Change in Current Net Yield% (bps) 3-month invoices 4.665 4.7869 0.009 expenses for six months 4.8325 5.0223 -0.003 Note for two years 99-19/256 4.6239 0.090 Note for three years 99-28/256 4.3197 0.099 Note for five years, 97-190/256 4.0063 0.080 Note for seven years, 97-146/256 3.9019 0.064 Note of 10 years, 97-216/256 3.7607 0.042 20-year bond 3.94 0.018 100-208/256 30 year 96-224/256 bond 3.8005 0.008 CURRENCY SWAP SPREADS Most recent (bps) Net Change (bps) U.S. dollar swap spread over two years: 33.00 4.25 United States dollar 3-year swap spread: 20.25 3.25 U.S. dollar swap spread over five years: 6.50 1.25 United States dollar 10-year swap spread: -1.00 0.75 United States 30-year dollar swap spread: -39.25 minus 0.75