10-year Treasury yield ticks up to 3.5% as Fed goes quiet

3:56 pm ET January 23, 2023 (MarketWatch) Print

By Joy Wiltermuth and Jamie Chisholm

U.S. government bond yields rose modestly on Monday to kick of another week of corporate quarterly earnings, but a light one for economic data.

What's happening

What's driving markets

Treasury yields rose modestly across the board on Monday as investors monitored another raft of corporate quarterly earnings for signs of fallout from the Federal Reserve's rapid pace of rate hikes last year.

Benchmark 10-year Treasury yields have fallen about 0.71 percentage points from their 52-week high of 4.231% hit in October on expectations the U.S. economy is fading in the face of the Fed's tightening of monetary policy as it battles high inflation.

It's a quiet start to the week for U.S. economic data, albeit with the U.S. leading economic index, LEI, recording a 1% drop in December, flashing even stronger signals that a recession is likely soon. Economists polled by The Wall Street Journal expected a 0.7% decline.

There aren't any Fed speakers scheduled to talk in the coming days as the central bank is now in its blackout period ahead of its next decision on interest rates, due February 1st.

Markets are pricing in a 99.9% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.50% to 4.75% after its meeting next week, according to the CME FedWatch tool. The central bank is expected to take its fed-funds rate target to 4.95% by June 2023, according to 30-day Fed Funds futures.

In Europe, the benchmark 10-year German bund yield rose 2.4 basis points to a two-week high of 2.199% after European Central Bank President Christine Lagarde reiterated late last week that she expected to continue raising interest rates to dampen inflation and a survey of economists showed most expected the EU to avoid recession this year.

General Electric Co.(GE) is scheduled to report quarterly results on Tuesday, with the industrial conglomerate expected to report its highest profit since before the COVID pandemic. Verizon Communications Inc.,(VZ) Microsoft Corp. (MSFT), AT&T Inc.(T) and Boeing Co. (BA) also are among the major companies due to report results this week.

What are analysts saying

"As central banks prepare to stop or pause hiking by the summer, the financial conditions loop becomes less of a driving force as the market flips from obsessing about inflation risk to obsessing about growth/recession risk. So we could see an extended period where bond/equity correlations turn negative again. In other words, investors who are worried about growing recession risk may see bonds as a good hedge for risky assets once again (at least in the short run)," said Stephen Innes, managing partner at SPI Asset Management.

"Another dynamic comes from perceptions of weakening growth and easing monetary policy relative to the run of Fed Speak. While U.S. growth data are admittedly weak, much of it has come from 'soft data', with hard activity data holding up much better. And while there have been several Fed speakers voicing a preference for another downshift, hawk Waller, most notably, in the pace of hikes, the market is translating this into a lower terminal rate again," Innes added.

-Joy Wiltermuth

(END) Dow Jones Newswires

January 23, 2023 15:56 ET (20:56 GMT)