Treasury yields climb after stubborn US inflation data

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Yields on US government debt rose to their highest levels in two weeks on Monday as stubborn inflation and a jump in manufacturing activity tempered expectations for interest rate cuts in 2024.

Benchmark 10-year Treasury note yields rose 0.13 percentage points to 4.32 per cent, while those on two-year Treasuries, which are sensitive to interest rate policy, rose 0.09 percentage points to 4.71 per cent.

At current levels, the jump in yields — which move inversely to price — would respectively rank as 2024’s third- and fifth-largest increases for the two-year and 10-year bonds, according to LSEG data.

The moves came after data released on Friday showed year-on-year US inflation hit 2.5 per cent in February, according to the headline personal consumption expenditure metric tracked closely by policymakers at the Federal Reserve, up slightly from January’s figure. Data released earlier on Monday showed a jump in the ISM manufacturing index in March. 

Traders reacted by slightly scaling back expectations for US rates coming down. Markets are now pricing in two or three quarter-point cuts by the end of the year, down from five or six at the start of 2024.

Monday’s Treasury market moves were likely to have been caused by “a combination of the stronger PCE spending print on Friday and strong ISM,” said Gennadiy Goldberg, head of US rates strategy at TD Securities.

“Trading is also relatively thin today” because of the Easter holiday in London, “so that may explain some of [the moves],” he added.

Stephen Brown, Capital Economics’ deputy chief North America economist, wrote that ISM data showing a rise in the prices-paid index to a 20-month high “looks somewhat concerning for the Federal Reserve” but “appears to largely reflect higher oil prices rather than a renewed rise in core goods inflation pressures”.

After notching their strongest first quarter in five years, US stock prices on Monday followed Treasuries lower in early-afternoon trading in New York.

The benchmark S&P 500 index was down 0.3 per cent, with 290 stocks lower on the day. The tech-heavy Nasdaq Composite stood 0.1 per cent lower. European equity markets were closed.

Asian stocks began the quarter on the front foot. China’s CSI 300 and Hong Kong’s Hang Seng indices added 1.6 per cent and 0.9 per cent, respectively, after a rebound in China’s manufacturing activity added to hopes of improving economic growth.

In commodity markets, gold hit a fresh record high on the first day of the second quarter, extending a multi-month rally.

The metal was trading at $2,239.3 a troy ounce in New York on Monday, according to LSEG data, after hitting an intraday high of $2,265.49 earlier.

Brent crude, the international oil benchmark, rose 1 per cent to $87.83 a barrel — the highest level since late October.

Additional reporting by Kate Duguid in New York