Treasury Yields Have Nudged Higher Ahead of U.S. GDP and Inflation Data Later This Week.

Treasury yields showed minimal changes to slightly higher levels on Tuesday morning, lacking significant catalysts to drive the market amid a day devoid of major data releases.

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Key Details:

• The yield on the 2-year Treasury (BX:TMUBMUSD02Y) increased by 3 basis points, reaching 4.406% compared to Monday's 4.376%.
• The yield on the 10-year Treasury (BX:TMUBMUSD10Y) rose by 4.1 basis points, reaching 4.134% from Monday's 4.093%.
• The yield on the 30-year Treasury (BX:TMUBMUSD30Y) climbed by 4.9 basis points to 4.364% from 4.315% on Monday.

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Market Dynamics:Yields across the one-month to 30-year spectrum stabilized as traders awaited fresh information that could challenge the current consensus on the economy's trajectory and Federal Reserve policy. A notable event on the horizon is the Treasury's auction of $60 billion of 2-year notes scheduled for 1 p.m. Eastern time.

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Looking Ahead:The market's focus is on Thursday's preliminary reading of fourth-quarter U.S. GDP growth, expected to come in at an annual pace of 2%, down from the third quarter's 4.9% rate. Friday will see the release of the Fed's preferred inflation gauge, the PCE, for December.

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Market Sentiment:According to the CME FedWatch Tool, there is a 97.4% probability that the Fed will maintain interest rates within the range of 5.25%-5.50% next Wednesday. The likelihood of a 25-basis-point rate cut by March has decreased to 42.4%, down from 75.6% a month ago. The central bank is largely expected to bring its fed-funds rate target back down to 4%-4.25% or lower by December.

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Global Developments:The Bank of Japan opted to keep its policy unchanged on Tuesday, maintaining a short-term rate of minus 0.1% and upholding its yield-curve control parameters. Additionally, Chinese officials are reportedly contemplating measures to stabilize the country's stock market.

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Investor Perspectives:Brent Schutte, Chief Investment Officer of Northwestern Mutual Wealth Management Co., noted a recent surge in market expectations of inflation. He highlighted the rise in the five-year, five-year forward inflation breakeven rate, a measure closely monitored by the Fed, from a low of 2.13% in late December to 2.42% as of last Friday. Schutte expressed concerns about this trend potentially impacting the Federal Reserve's stance and increasing the likelihood of a recession in 2024.

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