Yields flat after in-line inflation data, strong spending numbers
By Matt Tracy
U.S. Treasury yields were largely flat following data on Friday that showed as-expected August inflation and consumer spending that surprised to the upside.
The benchmark U.S. 10-year Treasury note yield (US10YT=TWEB) was last up just 0.3 basis points at 4.177%. It hit its highest level since September 5 earlier in the week.
The 30-year bond yield (US30YT=TWEB) was last flat at 4.753%.
Yields were largely unmoved following Personal Consumption Expenditures price data, the Federal Reserve's preferred inflation measure, which fell in line with forecasts. They showed a 0.3% month-over-month increase in consumer goods and services from July to August.
Further data showed stronger-than-expected consumer spending from July to August, which was a surprise to some market participants.
"The one bright spot was that income and spending were a little bit firmer than expected, which means the consumer isn't falling off a cliff as the market was expecting," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.
Goldberg and others are closely tracking data that could sway the current market view of further rate cuts to come from the Fed at its next monthly meetings.
Treasury yields rose last week despite the Fed's 25-basis-point rate cut at its September meeting, its first since December last year, and the central bank's signal for further easing at future meetings.
They declined after Fed Chair Jerome Powell signaled caution around the U.S. central bank's next interest rate decision in Tuesday remarks.
Markets are now pricing in an 85.5% chance of a 25 bps interest rate cut from the Fed in October, and a 14.5% chance of a pause. U.S. rate futures have also priced in 44 bps worth of cuts through the end of the year, according to LSEG data.
The most-anticipated data points for the market will be labor market figures next week, assuming there is no federal government shutdown.
The risk of a partial U.S. government shutdown beginning next week is rising as congressional Democrats and Republicans hit an impasse over how to continue to fund the federal government.
"The Treasury market's a little bit nervous at the moment," Goldberg said about a potential shutdown. He and others noted how a shutdown could prevent the release of labor market and economic data to inform the Fed's upcoming rates decision.
"But I think the Fed would do what they have to do," said Eric Winograd, chief economist and strategist at AllianceBernstein. "There are private sector reports that are good but not as good they could turn to."
Winograd and others are looking to third-quarter economic data for signs of the Fed's coming decision.
"That being said, I think they're pretty set on a 25 bps cut at their next meeting (barring) a pretty strong employment report or a very alarming inflation number," Winograd added.
The two-year (US2YT=RR) yield, which typically reflects interest rate expectations, was last largely unchanged from Thursday's close at 3.661%.
A closely watched part of the U.S. Treasury yield curve measuring the gap between two- and 10-year Treasury notes (US2US10=TWEB), seen as an indicator of economic expectations, was last at 51.5 bps.
