Ahead of Crucial Inflation Data, Treasury Yields Rise

Thursday morning witnessed minimal changes in rates across the spectrum of Treasury bills, ranging from one-month to 30-year bonds, following the release of the January Personal Consumption Expenditures (PCE) Price Index, which aligned with expectations.

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The 2-year Treasury yield remained virtually unchanged at 4.645%, a slight shift from the 4.646% recorded on Wednesday. In contrast, the 10-year Treasury yield experienced a modest decline of 1.4 basis points, settling at 4.259% compared to the previous day's 4.273%. Similarly, the 30-year Treasury yield saw a marginal drop of 1.8 basis points to 4.39%, down from 4.408% on Wednesday. It's important to note that yields move inversely to prices.

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The latest economic data revealed that the PCE index for January reflected inflation in line with expectations, although still elevated. The month-over-month headline rate increased by 0.3%, while the core rate, excluding food and energy, exhibited a sharper 0.4% rise, marking the most significant increase in a year. Both figures matched the median estimates of economists polled by the Wall Street Journal. Meanwhile, the yearly inflation rate decelerated to 2.4% from the previous 2.6%, and the annual core reading dipped to 2.8% from 2.9%.

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Despite the hot inflation figures, the PCE report, recognized as the Federal Reserve's preferred inflation indicator, failed to alter market expectations for potential rate cuts in the coming months. Currently, markets indicate a 97.5% probability that the Fed will maintain interest rates between 5.25% and 5.5% on March 20, according to the CME FedWatch Tool. The likelihood of at least a 25-basis-point rate cut by June stands at 64.4%.

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In addition to the PCE data, Thursday brought additional economic indicators. Initial jobless claims for the week ending Feb. 24 increased by 13,000 to reach 215,000. On the international front, Japan's 10-year government bond yield rose by 1.6 basis points to 0.714% after central-bank policy maker Hajime Takata hinted at the growing proximity to exiting the country's negative interest-rate policy.

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Analysts have interpreted the latest developments, with Damian McIntyre, a portfolio manager at Federated Hermes in Pittsburgh, expressing his views. He noted, "Today’s print comes as no surprise following the CPI and PPI inflation reports earlier this month. Inflation continues to fall gradually, while economic growth is strong and the consumer is healthy. Higher-for-longer rates will likely stay with us until summer." McIntyre's observations highlight the consistent trend of moderate inflation alongside robust economic growth, suggesting a sustained period of elevated interest rates until the summer months.

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