Treasury yields move higher as traders look past disappointing U.S. data and toward tighter Fed policy

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By Vivien Lou Chen and Mark DeCambre

Treasury yields moved higher Friday morning, despite a series of disappointing U.S. economic data, as investors continued to focus on Federal Reserve policy makers setting the stage for tighter financial conditions, including a liftoff of the benchmark interest-rate target. U.S. stock and bond markets will be closed on Monday, for the Martin Luther King, Jr. Day holiday, while Fed officials are entering a blackout period for speeches ahead of their Jan. 25-26 meeting in Washington.

What are yields doing

What’s driving the market?

Markets have been unsettled by the prospect of tightening financial conditions but moves for yields have been comparatively subdued for much of the week, though the 2-year has been sold — pushing its yield higher.

Still, analysts are expecting that the benchmark 10-year Treasury yield will eventually breach 2%, a psychologically significant level for the debt used to price everything from mortgages to auto loans.

Expectations for higher yields are supported by comments from policy makers, including Federal Reserve Gov. Christopher Waller, who recently suggested that as many as five interest-rate increases are a possibility in 2022 as the central bank aims to beat back rampant inflation. However, Waller said his baseline expectation was for three rate increases on the year, which is more in line with expectations.

His remarks come as measures of inflation this week have shown pricing pressures at their highest levels in decades. Consumer prices rose 0.5% in December to push the increase in the cost of living last year to a nearly 40-year high of 7%.

Meanwhile, Lael Brainard, the White House nominee to serve as the Fed’s No. 2, told a Senate finance panel on Thursday that efforts to reduce inflation were the Fed’s most important task.

Data released on Friday showed that U.S. retail sales sank 1.9% for December, as omicron spread and shoppers confronted higher prices due to shortages and soaring inflation. Economists polled by The Wall Street Journal had forecast a 0.1% decline in December.Industrial output fell a disappointing 0.1% in December as auto production stumbled, compared to Wall Street expectations for a 0.2% gain. Capacity utilization — which reflects the limits to operating the nation’s factories, mines and utilities — inched lower to 76.5% in December from 76.6% in the prior month. Meanwhile, a closely followed gauge of U.S. consumer sentiment from the University of Michigan fell to 68.8 in January from 70.6 in the prior month, marking the second lowest reading in a decade.

What strategists are saying

“A difficult stock market close contributed to the 10-yr’s fast trip below 1.70% yesterday,” wrote Jim Vogel, executive vice president at FHN Financial, in a daily research note. One of the three factors that “accounted for the speed and size of the yield decline across the entire curve” was the large-scale buying in 5-year Treasury futures, which “surprised traders.”

-Vivien Lou Chen


(END) Dow Jones Newswires

01-14-22 1027ET

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