Bond Report: U.S. government bond yields inch higher as traders look ahead to inflation data, auctions


U.S. Treasury yields inched higher on Monday as traders looked ahead to key inflation data later this week and a series of debt auctions that could offer clues to demand for government paper.

How are Treasurys performing?

The 10-year Treasury note yield TMUBMUSD10Y, +0.14% added 0.4 basis point at 2.950%, after posting a 1.3 basis-point weekly drop late Friday in New York. The 30-year bond yield TMUBMUSD30Y, +0.13% rose 0.5 basis point to 3.120%, following a weekly decline of 1.1 basis points.

The 2-year note yield TMUBMUSD02Y, +0.17% the most sensitive to shifting expectations for monetary policy, was little changed at 2.499%. The short-dated note on Friday logged a weekly drop of 1.5 basis points.

The gap between the 2-year and 10-year Treasury notes, often considered the heart of the yield curve, was at 45.1 percentage points, narrowing slightly since late-Friday in New York.

Concerns that the yield curve could eventually invert, with short-dated yields moving above long-dated yields, is keeping investors on edge. An inverted yield curve has often preceded a recession.

Bond yields fall as prices rise, and vice versa.

What’s driving the bond market?

Trading action for government bonds was muted as investors looked past geopolitics and global trade issues to the more pressing issues of bond supply and inflation.

The Trump administration is reportedly seeking new rules to limit that would penalize the Mexican auto industry unless it boosts wages to roughly $16 an hour in an effort to retool the North American Free Trade Agreement. That development follows discussions between China and the U.S. last week that were seen as unproductive, failing to end with an agreement on trade to avert a full-blown trade dispute between the world’s two largest economies.

The U.S. crude-oil futures CLM8, +0.40%  benchmark topped $70 a barrel for the first time since late 2014, rising 1% alongside a similar increase in the international benchmark Brent crude as energy traders awaited word on whether the U.S. would pull out of a nuclear pact with Iran, and impose fresh sanctions on the oil producer, which could disrupt crude output.

See: Oil prices have surged above $70—here are 4 key reasons behind the rally

Rising oil prices and trade disputes threaten to put pressure on global prices, and inflation, which, in turn, can chip away at the fixed value of long-dated bonds in particular. The 10-year break-even inflation rate, derived through Treasury-inflation protected securities, suggests investors feel inflation will remain at 2.17% over the next 10 years, close to a four-year high.

Looking ahead, traders are eyeing the consumer-price index data on Thursday. Plus, investors will eye whether the bond market can take down the larger debt auctions after the Treasury Department announced modest increases to the size of the 7-year note, the 10-year note and the 30-year bond. Lingering concerns over the potential for a buyers’ strike have unnerved market participants.

Read: Americans are taking on more of the burden for funding record U.S. deficits

Monday’s trade also comes after a nonfarm-payrolls report showed that fewer jobs were produced in April than had been expected by economists surveyed by MarketWatch, while unemployment fell to 3.9%, the lowest level since around 2000, as some would-be workers exited the labor force. Still, the report wasn’t seen as significantly altering the monetary policy path of the Federal Reserve for an expected two additional interest-rate increases in 2018 and a reading of wages was muted.

Which Fed speakers and data are in focus

Richmond Fed President Thomas Barkin said he favored two or three more rate increases this year. His first speech concerning monetary policy, Barkin is a voting member of the policy-setting Federal Open Market Committee this year.

What are strategists saying?

“The market has been mostly zigging despite six Fed rate increases since late 2015. That’s because Fed rate increases confirm that U.S. economic growth is sufficiently robust to absorb the hikes. So the normalization of monetary policy seems to be bullish,” wrote economist Ed Yardeni of Yardeni Research in a Monday note.

“Bond market are trading with just a very mild defensive tilt. Again, in context, yields are no longer making new highs and the 10-year T-note has basically been moving sideways now for about three months. This week’s U.S. inflation data will provide a crucial test, though last week’s FOMC statement strong suggested that the Fed is not going to alter its go-slow approach even if we spend time above the 2% inflation target,” said David Rosenberg, chief economist for Gluskin Sheff.