Rising Bond Yields Amid Inflation Concerns

The bond market saw an increase in yields on Tuesday, despite worries about a slowdown in the global economy. The yield on the 2-year Treasury rose by 3.7 basis points to 4.908%, while the 10-year Treasury yield climbed 3.1 basis points to 4.216%. Additionally, the 30-year Treasury yield rose by 3.7 basis points to 4.334%.

Market Drivers

Fixed-income traders brushed off weak economic data and instead focused on inflation concerns, resulting in higher bond yields.

Upon returning from the Labor Day weekend, U.S. investors were greeted with news that China's service sector activity experienced its slowest growth in eight months in August. Simultaneously, a gauge of business activity in the eurozone hit its lowest level since November 2020.

However, benchmark Treasury yields moved upward as investors shifted their attention to the nonfarm payrolls report released last Friday. The report indicated that the U.S. labor market was still robust. Additionally, comments from Cleveland Federal Reserve President Loretta Mester, who expressed concerns about high inflation, influenced market sentiment.

Despite concerns about the global economy, inflation worries took center stage, driving bond yields higher in the market.

Oil Prices Hit 2023 Highs, Raising Concerns of Inflationary Pressures

The recent surge in oil prices has sparked concerns about the revival of inflationary pressures, potentially leading the Federal Reserve to maintain higher interest rates for a longer period. This development has attracted attention from market participants, who are closely monitoring the situation.

Expectations for Interest Rates

According to the CME FedWatch tool, there is a 93% likelihood that the Federal Reserve will keep interest rates unchanged at a range of 5.25% to 5.50% following its upcoming meeting on September 20. Furthermore, market pricing indicates a 36% chance of a 25 basis point rate hike to a range of 5.50% to 5.75% at the subsequent meeting in November.

Long-Term Outlook

Analysts don't anticipate the central bank reducing its Fed funds rate target to around 5% until June 2024, as indicated by the 30-day Fed Funds futures. This signals the market's expectation for a prolonged period of relatively high interest rates.

Economic Data Update

On Tuesday, investors will be paying attention to the release of U.S. factory orders for July, scheduled for 10 a.m. Eastern Time. This economic indicator could provide further insight into the state of the economy.

Analyst Views

According to Jim Reid, a strategist at Deutsche Bank, the recent increase in oil prices is likely to contribute to higher August Consumer Price Index (CPI) readings. This will pose a fresh challenge for central banks in their efforts to achieve their inflation targets. As a result, sovereign bonds have experienced selling pressure, primarily driven by rising inflation expectations.

In summary, the rise in oil prices has raised concerns about inflation and its implications for monetary policy decisions. Market participants are closely watching for any further developments that could affect interest rates and inflation projections.