August 18, 2022

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Treasury yields tick higher after economic data, Fed speakers

Treasury yields were flat to slightly higher Wednesday as investors weighed data on the U.S. services sector, more remarks by Federal Reserve officials and awaited jobs data.

A key measure of the Treasury yield curve moved further into inversion as short-dated rates rose, underlining recession worries.

What yields are doing
  • The yield on the 2-year Treasury note
    TMUBMUSD02Y,
    3.065%
    rose 3.1 basis points to 3.108% at 3 p.m. Eastern on Wednesday. Yields and debt prices move opposite each other.

  • The 10-year Treasury yield
    TMUBMUSD10Y,
    2.705%
    ticked up 0.7 basis points to 2.747%.

  • The 30-year Treasury bond yield
    TMUBMUSD30Y,
    2.947%
    edged down 0.7 basis points to 2.976%.

What’s driving the market

In U.S. economic data, the Institute for Supply Management said its July services index rose to a three-month high of 56.7%, suggesting the economy continues to expand despite growing headwinds. U.S. factory orders rose 2% in June, the government said Wednesday. Economists polled by MarketWatch had forecast a 1.2% gain.

Meanwhile, Federal Reserve officials this week have pushed back against market expectations for rate cuts in 2023 and largely warned that it may be difficult for policy makers to achieve a so-called soft landing for the economy as they attempt to rein in inflation.

Thomas Barkin, president of the Richmond Federal Reserve, insisted “the Fed is committed to getting inflation under control” in a speech Wednesday to Blue Ridge Community College in Virginia.

“There is a path to getting inflation under control,” Barkin said, “but a recession could happen in the process.”

The 2-year yield moved further above the 10-year rate on Wednesday. A prolonged inversion of that measure of the yield curve is seen as a reliable recession warning signal.

The U.S. Labor Department’s July jobs report, due Friday morning, will be the main event of the week when it comes to the economic calendar.

What analysts say

“Wednesday was a day of confirmation; 2s/10s inverted further, reaching -37 basis points (bp) – confirming our target zone of -40 bp to -55 bp remains relevant (and perhaps insufficiently ambitious). 10-year yields confirm 2.75% was a more compelling focal point than 3.00%,” wrote Ian Lyngen and Ben Jeffery, strategists at BMO Capital Markets. “A dizzying array of Fed speakers reiterated that inflation remains enemy number one for the real economy — leaving the debate between 50 bp and 75 bp as the most relevant discussion for September.”

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