Treasury Yield's Curve Steepens as Traders React to Latest Inflation Data

Yields on U.S. government bonds experienced a notable increase Monday morning, driven by traders' response to indicators suggesting persistent inflation, notably in the Institute for Supply Management's manufacturing index and the Personal Consumption Expenditures (PCE) report released last Friday.

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In terms of price movements:

• The yield on the 2-year Treasury note, represented by BX:TMUBMUSD02Y, climbed by 7.6 basis points to reach 4.694%, up from 4.618% recorded on Thursday.
• The yield on the 10-year Treasury note, denoted by BX:TMUBMUSD10Y, surged by almost 12 basis points, reaching 4.311% compared to 4.192% observed on Thursday.
• Similarly, the yield on the 30-year Treasury bond, designated as BX:TMUBMUSD30Y, also increased by nearly 12 basis points, reaching 4.453% as opposed to 4.337% on Thursday.

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The bond market remained closed on Friday due to the observance of the Good Friday holiday.

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Factors driving these market movements included a delayed reaction to Friday's PCE Price Index, considered the Federal Reserve's preferred measure of inflation, which revealed a significant increase in U.S. prices during February.

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Of particular interest were core prices, excluding volatile food and gas prices, which rose by 0.3% in February. Although the 12-month core rate slightly decreased to 2.8% from January's 2.9%, concerns regarding growing inflation risks emerged among analysts. This situation could potentially disrupt the Fed's anticipated three quarter-point rate cuts throughout the year.

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Furthermore, data released on Monday indicated a positive shift in business conditions among U.S. manufacturers in March, marking the first improvement in 17 months. This suggests a recovery in the industrial sector of the economy. Notably, the ISM's data revealed a 3.3-point increase in the prices-paid component, a key measure of inflation, reaching 55.8%.

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As traders returned from the extended holiday weekend, the spread between long-dated and short-dated yields widened, with long-dated yields increasing at a slightly faster rate than short-term rates. This adjustment reflects the market's incorporation of heightened inflation risks.

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Looking ahead, the focal point of this week's data will be Friday's release of the nonfarm payrolls report for March. Market expectations anticipate the creation of 200,000 new jobs in the U.S. economy during the previous month.

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