Ten-year Treasury yield hits two-week low ahead of Fed minutes and inflation data

Signs that haven flows are partly behind recent gains in Treasury prices came during European trading Wednesday, when news that a rocket had been fired from Lebanon at Israeli positions caused a further dip in yields.

However, analysts said the primary driver in pushing benchmark yields lower of late was a perceived shift among Federal Reserve officials to now suggest the central bank may not need to raise interest rates again in this cycle.

That narrative may be put to the test in coming sessions. “There will be a test of the central bankers’ sanguine attitude today and tomorrow as U.S. producer prices and U.S. consumer prices data is released,” said Russ Mould, investment director at AJ Bell.

“Producer prices are often a leading indicator of increases in the cost of consumer goods and therefore are a canary in the coal mine for any resurgence in inflationary pressures,” Mould added.

Traders also face another slew of Fed speakers on Wednesday, too. Fed Governor Christopher Waller will deliver comments in Park City, Utah at 10:15 a.m.; Atlanta Fed President Raphael Bostic is due to speak on the economic outlook at 12:15 p.m.; and Boston Fed President Susan Collins gives the Goldman Lecture on Economics at Wellesley College at 4:30 p.m..

Ahead of those comments markets are pricing in an 86% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on November 1, according to the CME FedWatch tool.

The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in December is priced at 25%, down from 40% a month ago.

The central bank is not expected to take its Fed funds rate target back down to around 5% until August 2024, according to 30-day Fed Funds futures.

The Treasury will auction $35 billion of 10-year notes at 1 p.m.

What are analysts saying

“The FOMC minutes will remind investors that ‘the rates will stay higher for longer’ if inflation remains above target,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“Going into the data, the expectation is a mostly softening inflation both for producer and consumer prices. Despite the rising crude prices, U.S. gasoline prices have been falling since mid-August due to a collapse in refiner margins. The latter could temper a seasonally strong September spending. But how long gasoline prices will remain on a falling path is yet to be seen,” she added.

“The risks in U.S. yields remain tilted to the upside despite the dovish Fed talk and the safe haven inflows into the U.S. treasuries following mounting tensions in the Middle East. The U.S. 2-year yield remains 50bp above the upper range of the Fed funds policy target,” Ozkardeskaya concluded.