Shorter-term Treasury debt extended a recent rally after new data showed that inflation cooled last month, sparking more bets that Federal Reserve interest-rate increases are coming to an end.
Yields, which fall when bond prices rise, dropped sharply after Labor Department figures showed the consumer-price index rose less than economists had expected in March. They rebounded somewhat as the morning progressed, but Wednesday’s trading still extended a rally that has taken yields lower since mid-March.
Slowing inflation and the potential fallout from strains in the financial sector have combined to depress Wall Street’s guesses about how high interest rates will stay. That has pushed down Treasury yields—especially on shorter-term government borrowing, where rates closely reflect how investors expect the Fed to set monetary policy.
In recent trading, the two-year Treasury note’s yield fell to 4.018%, according to Tradeweb, from 4.056% on Tuesday. The benchmark 10-year yield was roughly flat at 3.436%, compared with 3.433% Tuesday.
Treasury yields help set borrowing costs for everyone from homeowners to corporate finance chiefs. They are also a key input into many stock investors’ models, where lower yields, all else equal, push up assessments of how much shares are worth.
Some Treasury investors said they took encouragement from signs in the inflation data that price increases for consumers are slowing. The headline inflation figure showed that prices rose by 0.1% last month compared with February. That was down from 0.4% a month earlier and lower than the 0.2% increase that economists had predicted.
After the data’s release, traders leaned further into bets that any interest-rate increase at the Fed’s May meeting—if it materializes at all—will be the central bank’s last for the foreseeable future. Wall Street is now estimating two-thirds odds that the Fed raises rates again in May by a quarter of a percentage point to 5% to 5.25%, but only a 1-in-20 chance that rates will continue rising in June.
It is a bet informed by slowing inflation and the possibility that March’s banking distress could make it harder for businesses and households to borrow in the months ahead, denting economic growth.
Business surveys, for instance, have signaled that it has already gotten more difficult for companies to find new loans. Investors are also growing concerned that commercial landlords will struggle to finance their buildings if banks pull back on lending.
“The effects of the bank distress are the main reason why expectations have shifted away from another hike beyond May,” said
Anders Persson,
head of global fixed income at Nuveen. “Now, add to that how we’re seeing some light at the end of the tunnel from the inflation numbers.”
Mr. Persson said that contrary to prevailing bets in futures markets, he doesn’t expect the Fed to start cutting rates aggressively later this summer. Even so, he thinks yields will continue to fall through the end of this year, so Nuveen has been adding to its positions in longer-term Treasurys to benefit from the rising bond prices it anticipates.
Though bank distress has dissipated since mid-March, many on Wall Street are worried that banks may be about to curtail some lending, which could slow growth.
Economists at Citigroup, for example, believe that the economy will expand by more than 2% globally this year and that global inflation will end 2023 close to 6%. But if a credit crunch or a financial crisis develops, both of those figures could weaken considerably, they said in a note this week.
“We believe it’s too soon to be sanguine,” they wrote. “Financial stability stresses are powerful and often unpredictable.”
Wednesday afternoon, traders will get a look at internal notes from the Fed’s March meeting, when central bankers faced a tough decision over whether to continue raising interest rates even amid the collapses of Silicon Valley Bank, Signature Bank and Credit Suisse. Fed officials opted for a quarter-percentage-point rate hike in March despite fears that such a move could exacerbate a crunch in the financial sector.
—Eric Wallerstein contributed to this article.
Write to Matt Grossman at matt.grossman@wsj.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Shorter-term Treasury debt extended a recent rally after new data showed that inflation cooled last month, sparking more bets that Federal Reserve interest-rate increases are coming to an end.
Yields, which fall when bond prices rise, dropped sharply after Labor Department figures showed the consumer-price index rose less than economists had expected in March. They rebounded somewhat as the morning progressed, but Wednesday’s trading still extended a rally that has taken yields lower since mid-March.
Slowing inflation and the potential fallout from strains in the financial sector have combined to depress Wall Street’s guesses about how high interest rates will stay. That has pushed down Treasury yields—especially on shorter-term government borrowing, where rates closely reflect how investors expect the Fed to set monetary policy.
In recent trading, the two-year Treasury note’s yield fell to 4.018%, according to Tradeweb, from 4.056% on Tuesday. The benchmark 10-year yield was roughly flat at 3.436%, compared with 3.433% Tuesday.
Treasury yields help set borrowing costs for everyone from homeowners to corporate finance chiefs. They are also a key input into many stock investors’ models, where lower yields, all else equal, push up assessments of how much shares are worth.
Some Treasury investors said they took encouragement from signs in the inflation data that price increases for consumers are slowing. The headline inflation figure showed that prices rose by 0.1% last month compared with February. That was down from 0.4% a month earlier and lower than the 0.2% increase that economists had predicted.
After the data’s release, traders leaned further into bets that any interest-rate increase at the Fed’s May meeting—if it materializes at all—will be the central bank’s last for the foreseeable future. Wall Street is now estimating two-thirds odds that the Fed raises rates again in May by a quarter of a percentage point to 5% to 5.25%, but only a 1-in-20 chance that rates will continue rising in June.
It is a bet informed by slowing inflation and the possibility that March’s banking distress could make it harder for businesses and households to borrow in the months ahead, denting economic growth.
Business surveys, for instance, have signaled that it has already gotten more difficult for companies to find new loans. Investors are also growing concerned that commercial landlords will struggle to finance their buildings if banks pull back on lending.
“The effects of the bank distress are the main reason why expectations have shifted away from another hike beyond May,” said
Anders Persson,
head of global fixed income at Nuveen. “Now, add to that how we’re seeing some light at the end of the tunnel from the inflation numbers.”
Mr. Persson said that contrary to prevailing bets in futures markets, he doesn’t expect the Fed to start cutting rates aggressively later this summer. Even so, he thinks yields will continue to fall through the end of this year, so Nuveen has been adding to its positions in longer-term Treasurys to benefit from the rising bond prices it anticipates.
Though bank distress has dissipated since mid-March, many on Wall Street are worried that banks may be about to curtail some lending, which could slow growth.
Economists at Citigroup, for example, believe that the economy will expand by more than 2% globally this year and that global inflation will end 2023 close to 6%. But if a credit crunch or a financial crisis develops, both of those figures could weaken considerably, they said in a note this week.
“We believe it’s too soon to be sanguine,” they wrote. “Financial stability stresses are powerful and often unpredictable.”
Wednesday afternoon, traders will get a look at internal notes from the Fed’s March meeting, when central bankers faced a tough decision over whether to continue raising interest rates even amid the collapses of Silicon Valley Bank, Signature Bank and Credit Suisse. Fed officials opted for a quarter-percentage-point rate hike in March despite fears that such a move could exacerbate a crunch in the financial sector.
—Eric Wallerstein contributed to this article.
Write to Matt Grossman at matt.grossman@wsj.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8