Treasury yields bounce as inflation expectations rise, retail sales jump

Long-term Treasury yields rose on Friday, offsetting weekly declines as market-based inflation expectations hit a 16-year high and retail sales were stronger than expected in September.

What is the yield doing?
  • Yield at 10 year Treasury Note TMUBMUSD10Y,
    The week ended at 1.574%, up 1.519% on Thursday from 3pm on Thursday. For the week, benchmark yields fell 3 basis points, the first time in seven weeks.

  • 2 year Treasury yield TMUBMUSD02Y,
    It rose 0.399% to 0.352% on Thursday afternoon. According to Dow Jones market data, the 2-year rate is the highest since March, the shortest end of the yield curve this week has backed up.

  • 30 year Treasury bond yield TMUBMUSD30Y,
    It rose 2.048% from 2.025% on Thursday afternoon, but fell to 2.161% at the end of last week.

What is driving the market?

According to Reuters, yields are bouncing after market-based measurement of inflation expectations, with five-year Treasury inflation-protected securities, or TIPS, trading above the break-even rate of 2.75%, the highest since April 2005.

U.S. retail sales rose 0.7% in September after gaining about 1% in August, boosting consumer demand which increased supply-chain constraints and strengthened inflationary pressures. Economists had expected a 0.2% fall in sales.

Meanwhile, the University of Michigan Consumer Sentiment Index fell unexpectedly to 71.4 for October. Inflation expectations rose to 4.8% the following year, while the 5 to 10 year outlook fell to 2.8%.

Long-term yields have declined this week, flattening the yield curve ফল yielding a line across Treasury maturity. The move comes after the September consumer-price index was slightly warmer than expected on Wednesday and the September producer-price index on Thursday was slightly smaller than expected.

Also on Wednesday, the minutes of the September meeting of the Federal Reserve confirmed the expectation that policymakers would start buying monthly assets before the end of the year.

According to some analysts, the direction of the yield curve reflects growing concerns of a policy error by the Federal Reserve, where the central bank tightens policy more aggressively than previously expected in an effort to control inflationary pressures. Policymakers initially expected “temporary”.

What are the analysts saying?

Moving towards the final months of the year, “economic growth may slow to a better-than-expected average in the first half of 2021, unemployment will continue to fall to its current level of 4.8%,” said John Gentry, senior portfolio manager at the Fed. Start reducing bond-market purchases.

“Treasury yields tend to be better than long-term averages, but do not demand something that policymakers need to catch overnight,” he wrote. “Indeed, remember that at the beginning of the last decade, 2-year Treasury yields ranged from 0.20% to 0.60% for more than three years.

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