Treasury yields rise again after the CPI report

The U.S. consumer price index (CPI) rose 0.5% in January, which translated to an annual gain of 6.4% versus 6.5% in December, against predictions of 6.2%. Furthermore, the number of Americans filing new claims for unemployment benefits unexpectedly fell last week. Despite the Fed’s rate push to cool the economy, the labor market is still tight. That’s why a vast majority of investors remain concerned about the pace of rate hikes in the wake of Fed members’ hawkish comments.

St. Louis President James Bullard said “continued policy rate increases can help lock in a disinflationary trend during 2023.” Consequently, he would not rule out supporting a 50-basis point rate hike in March. Moreover, Loretta Mester, President and CEO of the Federal Reserve Bank of Cleveland, said data has not changed her view that officials would need to bring the U.S. Fed funds rate above 5%. She “saw a compelling economic case for a 50 basis-point increase earlier this month.” She added that the U.S. central bank has to be prepared to move higher if inflation remains stubbornly high.

Against this backdrop, Treasury yields rose again as investors bet on a more aggressive Federal Reserve. The yield on the U.S. 10-year Treasury climbed to 3.82%, up 8 basis points week-over-week. The 2-year Treasury yield jumped to a more than 3-month high, topping 4.62%. The yield curve is inverting to extreme levels (around -80 basis points) last seen in September 1981. Money markets are currently pricing in a terminal rate of 5.28% by August.

Unsurprisingly, yields rose across all major advanced economies. In Europe, the yield on the German 10-year Bund gained 7 basis points to 2.44% from 2.37%. The French OAT yield followed suit, up 8 basis points at 2.91%.

The move higher in rates pegged all bond segments. Investment grade corporate bond prices were down 0.68% in Europe (IBOXX € Liquid Corporates index up 1.38% year-to-date) and down 0.72% in the U.S. (IBOXX Ishares $ Investment Grade Corporate Bond Index up 1.63% YTD).

High-yield bonds did not fare better. They edged down 0.35% in Europe (IBOXX € Liquid High Yield Index up +3.39% YTD) and lost 0.70% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index up 1.59% YTD). Emerging debt dropped 1.21% (+1.58% YTD), weighed by a strong greenback (dollar index above 103.88).

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