Treasury yields rose slightly on Tuesday after durable goods orders rebounded in February, pointing to a robust U.S. economy as the market awaits key inflation data later this week to gauge when the Federal Reserve will act the interest rate cut could begin.
Orders for U.S. durable goods rose more than expected last month and business spending on equipment showed early signs of recovery, improving the economic outlook in the first quarter.
The Commerce Department report suggested that the manufacturing sector could bounce back after struggling as the Fed aggressively tightened monetary policy to curb inflation.
The two-year (US2YT=RR) Treasury yield, which typically moves in line with interest rate expectations, rose 2.7 basis points to 4.614, while the 10-year Treasury yield rose US10Y rose 1 basis point to 4.263%.
“Markets are just waiting for a clear sign that inflation is slowing. After the Fed meeting, we are really back in data watch mode,” said Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities in New York.
“That’s why returns fluctuate. Traders look at every single data point, critical or not, to estimate where interest rates are headed next.”
The market now expects the Fed to cut about 78 basis points by December, more than early last week but about half of what Fed funds futures showed earlier this year after Fed policymakers announced the idea of impending interest rate cuts. (FEDWATCH)
The Treasury Department plans to auction $67 billion of five-year notes on Tuesday and $43 billion of seven-year notes on Wednesday.
The market expects the Fed to cut its federal funds rate by 78.4 basis points, or just over three cuts of a quarter of a percentage point each, by year-end. That's less than half of market bets at the start of the year, but is now in line with Fed forecasts.
However, Fed policymakers have raised their longer-term interest rate outlook, which the market will ultimately have to take into account.
“Previous research and Fed targets suggested 2.5% was about right,” said Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management in Boston.
“But persistent US budget deficits and financial conditions less sensitive to Fed interest rates have led to a rethink. Various studies suggest that a value in the 3% to 3.5% range may be a better target,” Mullarkey said.
The Treasury Department plans to auction $67 billion of five-year notes and $43 billion of seven-year notes on Wednesday at 1 p.m. ET (1700 GMT).
“Let’s see if there is enough demand for these auctions. Additional concessions may be required for the five-year and seven-year auctions,” Goldberg said.
The spread between two- and 10-year Treasury yields (US2US10=RR), which is seen as a harbinger of recession when short-term securities yield more than longer-term ones, narrowed to -35.3 basis points. The gap has been negative or “inverted” since July 2022.
The yield on the 30-year Treasury note (US30YT=RR) fell 0.2 basis points to 4.424%.
The breakeven rate for five-year U.S. Treasury Inflation-Protected Securities (TIPS) (US5YTIP=RR) was last at 2.472%.
The 10-year TIPS breakeven rate (US10YTIP=RR) was last at 2.338%, suggesting the market expects inflation to average about 2.3% per year over the next decade.
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