As Inflation Data Looms, Treasury Yields Hold Steady

On Tuesday morning, Treasury yields remained relatively steady, following two consecutive days of increases for the 2- and 10-year rates. Traders are anticipating the release of U.S. inflation data on Wednesday and are waiting to see its impact on the market. 

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Analysts predict that the headline annual CPI inflation rate will remain at 5% in April, while core CPI, which removes the effects of volatile items such as food and energy, may slightly decrease from 5.6% to 5.5% on an annual basis. 

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Even if this outcome occurs, headline inflation will remain significantly above the Federal Reserve's 2% target, but it will also be a considerable drop from the multi-decade high of 9.1% reached in June of last year. 

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As a result, traders may believe that the central bank will pause its cycle of interest rate hikes. The CME FedWatch tool predicts that markets expect an 85.7% chance of the Fed keeping interest rates unchanged at a range of 5% to 5.25% on June 14. 

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By December, 30-day fed funds futures predict that the central bank will likely take its fed funds rate target back down to between 4.25% and 4.5%. There are no significant U.S. economic updates scheduled for release on Tuesday, but New York Fed President John Williams is set to speak at 12:05 p.m. Eastern time. 

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Veronica Clark and Andrew Hollenhorst, economists at Citi, expect a 0.435% month-on-month increase in core CPI in April. This is one of two critical CPI inflation reports expected ahead of the June FOMC meeting.

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Clark and Hollenhorst believe that higher-than-expected inflation will likely lead to notable upward revisions in the Fed's inflation forecasts.

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Despite this, they still expect higher nominal policy rates this year, with their base case for further rate hikes in both June and July.

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