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Bond Report: Treasury yields edge higher, pushing 10-year rate above 2.8%, ahead of Wednesday’s Fed minutes report

U.S. bond yields nudged higher on Tuesday on diminished demand for fixed-income assets as investors prepared for this week’s release of minutes from the Federal Reserve’s July meeting.

What’s happening

The yield on the 2-year Treasury

was 3.208%, up from 3.201% on Monday afternoon.

The yield on the 10-year Treasury

rose to 2.839% from 2.79% as of Monday. As of Monday, the 10-year Treasury yield was down 69 basis points from its 52-week high in mid-June, but remains up 129 basis points for the year to date.

The yield on the 30-year Treasury

advanced to 3.15%, up from 3.096% on Monday.

What’s driving markets

Bond buyers were on the back foot, pushing yields a touch higher, as a rally in the previous session — bolstered by a very weak U.S. East Coast manufacturing survey and signs of a slowing Chinese economy — showed signs of fading.

“After U.S. activity and inflation data last week had an air of ‘goldilocks’ feel to them, economic data out of China and the U.S. to start the week came in clearly on the ‘too cold’ side for global growth,” said Brian Daingerfield, head of G10 FX strategy at NatWest Markets.

The 10-year to 2-year spread of about negative 39 basis points means the yield remains deeply inverted, suggesting a looming economic downturn.

Bond yields had been further pressured at the start of the week by a sharp slide in oil prices, which bolstered hopes that the U.S. had witnessed peak inflation in June.

Crude prices continued to slide on Tuesday and news out of China suggests Beijing is prepared to support the struggling property sector, which has soothed global growth concerns.

In U.S. data released on Tuesday, construction on new U.S. homes fell a seasonally adjusted 9.6% in July to 1.45 million, while building permits also dropped 1.3% to 1.67 million. U.S. industrial production was up sharply that month, rising 0.6%.

Meanwhile, investors are awaiting Wednesday’s release of the minutes from the Fed’s July 26-27 policy meeting.

Markets are pricing in a 59.5% probability that the Fed will raise interest rates by another 50 basis points to a range of 2.75% to 3% at its Sept. 20-21 meeting. The central bank is mostly expected to lift borrowing costs to 3.5% to 3.75% by next March, according to fed funds futures traders.

What analysts are saying

“We expect the Fed’s July meeting minutes released on Wednesday to be quite hawkish. Meeting-by-meeting forward guidance has been laid to rest, but forward guidance in general has not,” Alex Pelle and Steven Ricchiuto, U.S. economists at Mizuho Securities, said in a note.

“Markets interpreted the July Fed meeting as dovish, despite the central bank’s 75-bp hike, and in response, Fed speakers across the hawk-dove spectrum have spent much of the past few weeks trying to disabuse the market of the view that the Fed will fail to follow through its policy projections in the latest summary of economic projections,” the Mizuho strategists added.

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