Bond Yields Rise as Investors Await U.S. Retail Sales Update

Introduction

Bond yields experienced an increase on Tuesday, with benchmark Treasury yields nearing their highest level since the global financial crisis in 2008. This surge in yields comes as investors eagerly await an update on U.S. retail sales.

Key Details

• The yield on the 2-year Treasury (BX:TMUBMUSD02Y) remained relatively stable at 4.965%. It's important to note that yields move in the opposite direction to prices.
• The yield on the 10-year Treasury (BX:TMUBMUSD10Y) increased by 3.7 basis points to 4.233%.
• The yield on the 30-year Treasury (BX:TMUBMUSD30Y) rose by 4.6 basis points to 4.336%.

Market Drivers

Several U.S. economic updates are scheduled for release on Tuesday, including retail sales for July and the August Empire State manufacturing survey. These reports will be made available at 8:30 a.m. Eastern time. Additionally, traders will receive the June business inventories numbers and the August NAHB builders confidence index at 10 a.m.

Investors are particularly focused on the retail sales data, as it provides insight into how consumers are faring in light of the Federal Reserve's efforts to raise borrowing costs. It's worth noting that benchmark 10-year yields have surpassed 4.2%.

According to the CME FedWatch tool, market expectations indicate an 89% likelihood that the Federal Reserve will maintain interest rates at a range of 5.25% to 5.50% after their next meeting on September 20.

Chances of Rate Hike Increase

The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in November is priced at 34%, up from 28% a week ago.

The central bank is not expected to take its Fed funds rate target back down to around 5% until April 2024, according to 30-day Fed Funds futures.

Expert Analysis

Henry Allen, strategist at Deutsche Bank, noted that the U.S. 10-year real yield — the Treasury yield minus inflation — closed Monday’s session at a post-2009 high of 1.84%.

“The main factor driving yields higher was the prospect that the Fed would keep policy in restrictive territory for longer than previously anticipated. In fact, fed funds futures for the December 2024 meeting hit a new high for this cycle yesterday, closing at 4.29%, so we’re continuing to see markets reappraise the policy path in a more hawkish direction,” said Allen.

“Now admittedly, that’s still beneath the 4.6% rate signaled in the Fed’s dot plot from June. But market pricing was at just 3.73% on July 13, so now we’ve seen more than 50bps worth of rate hikes being priced back in for next year in the space of just over a month.” he added.