U.S. Treasury yields edged higher on Monday as investors braced for a busy economic week headlined by the Federal Reserve’s interest rate decision and a key inflation report. The 10-year yield rose by 3 basis points to 4.416%, while the 2-year yield increased to 3.93%, and the 30-year yield hit 4.963%. The market movements reflect caution ahead of the Fed’s two-day policy meeting, set to conclude Wednesday, as well as economic data that could influence future rate moves.
Trade developments added some optimism to the outlook, with the U.S. and European Union reaching a tentative deal to reduce proposed tariffs. Under the agreement, 15% tariffs will be imposed on EU imports to the U.S., down from a potential 30%, a move that alleviated concerns of escalating trade tensions. Still, investors remained focused on how the tariffs, even in reduced form, may impact inflation.
Despite the anticipation surrounding the Fed meeting, markets overwhelmingly expect no change to the benchmark interest rate, which currently stands at 4.25% to 4.50%. According to CME Group’s FedWatch Tool, there is a 97% probability that rates will remain unchanged. Instead, investors are eager to hear Fed Chair Jerome Powell’s comments on economic conditions and the central bank’s rate trajectory going forward.
Analysts say the bond market’s reaction will largely depend on whether the Fed signals confidence in managing inflation. Nikko Asset Management’s Naomi Fink noted that any indication the Fed is lagging in its inflation response could pressure long-term yields. Conversely, weaker economic or inflation data could lead to renewed expectations for interest rate cuts later this year.
Further clarity may come from Thursday’s release of the personal consumption expenditures (PCE) index, the Fed’s preferred inflation measure. Economists expect June’s PCE to show a year-over-year rise to 2.4%, up from 2.3%. A series of labor market reports, including job openings, private payrolls, and Friday’s nonfarm payrolls- will also contribute to shaping market sentiment and the Fed’s future policy stance.
Source: CNBC