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Bond Report: Treasury yields edge lower as still-high inflation puts focus on Fed rate hikes

U.S. bond yields were edging lower on Friday after of the release of economic data showed a continued slowing of price pressures, but also a pullback in consumer spending.

What’s happening

The yield on the 2-year Treasury

was at 4.10%, down 2 basis points.

The yield on the 10-year Treasury

was at 3.52, off 3 basis points.

The yield on the 30-year Treasury

was near 3.70%, down 4 basis points.

What’s driving markets

The Federal Reserve’s preferred measure of inflation, the PCE price index for February, showed the cost of U.S. goods and services rose by 0.3% in February, while the yearly increase in prices fell to 5% from 5.3% in the prior month, the lowest level in more than a year and a half.

“The latest inflation data affirm our view that the Fed will continue to raise interest rates,” Oren Klachkin, lead U.S. economist at Oxford Economics, wrote in a client note.

His team expects to see Fed rate increases of 25 basis points both in May and June, but said, “the recent banking turmoil lends a risk that the Fed may stop after May.”

Another big economic data point was a retreat in consumer spending, with a slight 0.2% increase in February, taking some of the punch out of January’s robust figure. This comes despite incomes advancing slightly at 0.3% for the month.

In the eurozone, the year-over-year inflation rate fell to a slightly below consensus 6.9% from 8.5%, but the core measure ticked up a tenth to 5.7%.

Away from economic data, there will be a speech Friday at 3:05 p.m. Eastern from New York Fed President John Williams on monetary policy and the economic outlook. There are two more Fed speakers on Friday night.

What analysts are saying

“The bond party that commenced earlier this quarter should continue in the months ahead as inflation continues to move toward its steady state of 2 percent,” said Peter Essele, head of portfolio management at Commonwealth Financial Network, in emailed comments following the PCE data release.

“Fixed income will likely offer investors double-digit returns in 2023, besting stock returns in a rare event of outperformance.”

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