Treasury Yields Edge Modestly Higher With Investors Focusing on Inflation and Election

On Monday morning, yields on U.S. government debt experienced a slight increase as investors geared up for the upcoming release of June’s consumer-price index later this week.

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• The 2-year Treasury yield was at 4.618%, up 1.9 basis points from Friday's 4.599%. Friday's level marked the lowest since March 27, based on 3 p.m. Eastern time data from Dow Jones Market Data.
• The 10-year Treasury yield stood at 4.283%, a rise of 1.1 basis points from 4.272% on Friday.
• The 30-year Treasury yield edged up to 4.476%, an increase of less than 1 basis point from Friday’s 4.468%.

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Friday’s yields were the lowest for the 10- and 30-year Treasurys since June 25-27.

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A key event driving market attention this week is the release of the June consumer-price index (CPI) on Thursday. This follows two days of testimony by Federal Reserve Chair Jerome Powell to Congress. Market participants are keenly focused on the CPI report for signs of whether inflation is moderating sufficiently to allow the Federal Reserve to consider its first interest-rate cut by September.

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In addition to domestic factors, an overseas development also influenced U.S. Treasurys. In France, recent elections resulted in left-wing parties winning most seats in the National Assembly, though not enough to form a coalition. This outcome led to a slight cheapening of Treasurys overnight.

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BMO Capital Markets strategists Ian Lyngen and Vail Hartman commented, "The results suggest it will be difficult to push through any major reforms as no party has a majority. We’re reminded that gridlock is good – at least from the perspective of financial markets."

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With the French political situation clarified, attention in financial markets is shifting back to U.S. politics, particularly the upcoming presidential election. There are increasing calls for President Biden to withdraw from the November race, making the potential introduction of a new Democratic candidate a significant point of interest for investors.

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Lyngen and Hartman noted, "Investors’ response to a new candidate from the Democrats is uncertain and likely contingent on the individual. However, recent price action suggests that an increased probability of Trump retaking the White House has been a bear steepener in the U.S. government-debt market, implying the opposite effect if the Democrats nominate a different contender."

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The potential political changes, both domestically and internationally, are creating a complex backdrop for U.S. Treasurys. While the gridlock in French politics is seen as favorable for financial markets, the uncertainty surrounding the U.S. presidential election adds a layer of unpredictability. The upcoming CPI report will be a critical indicator for market participants, as it could influence the Federal Reserve's policy decisions in the coming months.

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Investors are closely monitoring these developments, as they could have significant implications for the broader financial markets. The interplay between inflation data, Federal Reserve actions, and political changes will likely continue to drive market movements in the near term.

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The slight rise in U.S. government debt yields on Monday reflects investor caution ahead of key economic data and political developments. The June CPI report, set for release on Thursday, will be a pivotal moment for financial markets, potentially shaping expectations for Federal Reserve policy. Meanwhile, the resolution of the French elections and the ongoing U.S. presidential race add further complexity to the market outlook. Investors will need to navigate these multifaceted factors as they make decisions in the coming days.

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