The 10-year Treasury Yield Remains Below 4% Ahead of the U.S Inflation Report

During Tuesday morning, Treasury yields experienced mostly downward movement as traders awaited the release of the June consumer price index report scheduled for Wednesday.

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Here's the breakdown of the Treasury yields:

• The yield on the 2-year Treasury remained relatively unchanged at 4.864%, compared to 4.862% on Monday.
• The yield on the 10-year Treasury retreated by 2.1 basis points to 3.985% from 4.006% late Monday.
• The yield on the 30-year Treasury fell by 2 basis points to 4.022% from 4.042% on Monday afternoon.

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The decline in U.S. yields reflects traders positioning themselves ahead of the release of June's consumer price inflation data, which may impact the Federal Reserve's decision on another interest-rate hike later this month. Moreover, traders slightly scaled back expectations of a rate hike by the Fed after July.

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The drop in the 10-year Treasury yield below 4% followed reports of falling prices in the used-car market and lower household inflation expectations, offsetting the robust labor market reports from the previous week.

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According to the CME FedWatch Tool, markets are pricing in a 92.4% probability of a 25 basis points increase in the Fed's policy interest rate to a range of 5.25% to 5.50% on July 26. However, it is not anticipated that the central bank will lower its fed-funds rate target back to around 5% or lower until May next year.

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Today, there is a $40 billion 3-year note auction scheduled for 1 p.m. Eastern time.

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In the United Kingdom, 2-year gilt yields approached 15-year highs around 5.4% following data that revealed a 6.9% annual growth in employees' average total pay, including bonuses, for the three-month period ending in May. Bank of England Governor Andrew Bailey has cited this wage growth as a driver of inflationary pressures, leading to expectations of interest rate increases from the current 5% to a cycle peak of 6.5% in the upcoming months.

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Analysts from BMO Capital Markets noted that the distinction between headline and core inflation has had limited impact on the trading direction in the U.S. rates market throughout 2022. They highlighted that both measures of consumer prices have been running at high levels, rendering any comparison irrelevant. With headline inflation expected to reach 3.1% on a yearly basis, they emphasized that it is still indicative of the Federal Open Market Committee (FOMC) needing to address inflation concerns. However, they also argued that following the July rate hike, the focus may shift towards avoiding rate cuts rather than further action on inflation.

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