Treasury Yields Tumble as Markets Bet July 2023 Will Be the Final Rate Hike

The most recent data release unveiled a moderate 0.2% increase in the U.S. Consumer Price Index (CPI) for the preceding month, following a slight 0.1% upturn observed in May. Furthermore, the 12-month inflation rate has decelerated to 3% from its previous standing at 4%, signifying the slowest pace of price escalation since March 2021.

Despite these figures, most investors maintain their anticipation of the Federal Reserve's intention to resume raising interest rates later this month.

Nevertheless, market sentiment suggests that the forthcoming rate hike in July could potentially mark the culmination of the current cycle. Investors are positioning themselves accordingly, wagering that this action may represent the final move before a potential pause in interest rate adjustments. As a result, the U.S. 10-year Treasury yield fell sharply, down 24 basis points, to 3.83% from 4.07%. The yield on the 2-year Treasury dropped by nearly 18 basis points, at 4.77%.

In Europe, the yield on the German 10-year Bund lost 13 basis points from 2.64% to 2.51%.

The bullish backdrop pushed investment grade corporate bond prices higher. In Europe, the IBOXX € Liquid Corporates index gained 1.19%. In the U.S., the IBOXX $ Domestic Corporates Index was up 2.40%.

High-yield bonds were up 0.70% in Europe (IBOXX € Liquid High Yield Index) and jumped 1.76% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index).

The top performer within the asset class was the emerging debt in local currencies (+3.00% week-over-week, best weekly return since January 2023) as the greenback sank to its lowest level since April 2022.

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