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Treasury yields were little changed in early trading, with the 10-year hovering near its highest since late April.
The latest surge in Treasury yields to multi-month peaks had a few factors behind it, analysts noted. But the biggest was the ISM services report for December, released Tuesday, which showed the prices paid indicator jumping to its highest in almost two years, according to Jim Reid, strategist at Deutsche Bank.
“It’s true that the prices paid might not have the same impact as a CPI report, but it’s worth noting that a similar spike last January came right before some very strong U.S. inflation prints in Q1 2024. And in turn, that led to a big reassessment of how quickly the Fed would cut rates, hence we saw such a big market reaction yesterday,” Reid added.
Traders will be keen to see if that is confirmed by Wednesday’s data, with the ADP private sector jobs report for December released at 8:15 a.m. Eastern, followed 15 minutes later by the weekly initial jobless claims. The labor data set will be completed by Friday’s nonfarm payrolls report for December.
The latest economic reports have helped pushed down the probability of a 25 basis point interest rate cut by the Federal Reserve at its January 29 meeting to just 4.8%, according to the CME FedWatch tool. Further insight to the Fed’s thinking will be provided by the release at 2:00 p.m. of the minutes for the FOMC’s December meeting.
“The market mood is priced for a hawkish reading of tonight’s Fed minutes. We expect them to show a balance of risks to inflation and the labour market, and to double down on their gradual approach to rate cuts. If we are correct, then it may temper some of the selloff in the Treasury market,” said Kathleen Brooks, research director at XTB.
The Treasury will announce the result of a $22 billion auction of 30-year bonds at 1:00 p.m.
The bond markets will close early at 2:00 p.m. on Thursday in observance of former President Jimmy Carter’s funeral.
