Treasury Yields Flirt With Five-week Highs as Central Bankers Continue to Resist Rate Cuts

Long-term Treasury yields reached their highest levels in the new year on Wednesday, propelled by robust U.S. retail sales figures for December and an upswing in U.K. inflation. This surge dampened optimism regarding the likelihood of substantial interest-rate cuts by central banks in the coming months.

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Here's a breakdown of the key movements:

• The yield on the 2-year Treasury (BX:TMUBMUSD02Y) increased by 12 basis points, rising to 4.346% from Tuesday's 4.226%.
• The yield on the 10-year Treasury (BX:TMUBMUSD10Y) experienced a 4-basis-point jump, reaching 4.104% compared to the previous day's 4.064%.
• The yield on the 30-year Treasury (BX:TMUBMUSD30Y) rose by 1.8 basis points to 4.321%, up from Tuesday's 4.303%.

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The 10- and 30-year yields reached their highest levels since December 12 during Tuesday's trading.

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The surge in yields followed the release of U.S. economic data, with retail sales for December climbing by 0.6%, surpassing the Wall Street Journal's forecast of a 0.4% gain. This data reinforced the notion that the economy remains sufficiently robust, potentially delaying any Federal Reserve interest rate cuts as early as March. Federal Reserve Governor Christopher Waller mentioned on Tuesday that while rate cuts are likely this year, the shift in monetary policy does not need to be hurried.

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Market expectations, as reflected in the CME FedWatch Tool, indicate a 97.4% probability that the Fed will maintain interest rates between 5.25% and 5.5% on January 31. The likelihood of a 25-basis-point cut in the fed-funds rate by March has slightly decreased from 63.1% to 57.6%, while the probability of no action in two months stands at 40.9%.

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In addition to U.S. economic indicators, inflation in the U.K. unexpectedly accelerated to 4% in December, fueling concerns that central banks might need to keep borrowing costs elevated for a more extended period.

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European Central Bank President Christine Lagarde commented on Wednesday that while it is likely eurozone interest rates will be cut later in the year, the aggressive pricing of the timing and pace of monetary easing by markets is not helpful.

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Ian Lyngen, a rates strategist at BMO Capital Markets, noted that the upside surprise in December's retail sales supports Q4 growth expectations and acts as a counterforce against expectations of a Fed rate cut in March. Following the data release, Treasury markets weakened, with the 2-year sector being the notable underperformer.