Bond Yields Decline on Concerns About Chinese Growth and Awaited Retail Sales Data

by Warren Seah

What’s happening

  • The yield on the 2-year Treasury TMUBMUSD02Y, 4.700% slipped by 3.8 basis points to 4.704%. Yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.759% retreated 4.9 basis points to 3.763%.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.891% fell 3.5 basis points to 3.895%.

What’s driving markets

Benchmark Treasury yields are trending downward due to concerns about sluggish growth in China, which is boosting optimism regarding the reduction of global inflationary pressures.

The 10-year U.S. yield has reached its lowest point in almost three weeks, following a decline of approximately 30 basis points since July 7, after data indicated that U.S. inflation hit its lowest level in over two years during June.

Investors are closely observing the upcoming retail sales data, scheduled for release at 8:30 a.m. Eastern, to gauge the impact of the Federal Reserve’s aggressive rate hike campaign since March 2022 on household spending.

According to the CME FedWatch tool, markets are currently pricing in a 97% probability of a 25 basis point interest rate increase to a range of 5.25% to 5.50% following the Federal Reserve’s meeting on July 26.

The likelihood of another 25 basis point hike at the next meeting in September is currently priced at only 12%, while for the November meeting it stands at 22%.

Based on 30-day Fed Funds futures, it is anticipated that the central bank will not lower its Fed funds rate target to around 5% until April 2024.

Additional economic data expected on Tuesday includes June industrial production and capacity utilization at 9:15 a.m. Eastern. Business inventories for May and the July home builder confidence index will be published at 10 a.m.

Analyst Perspectives

“A better-than-expected outcome could boost inflation expectations and slow down the depreciation of the U.S. dollar. However, unless we see significantly strong data, any improvement is unlikely to reverse the bearish trend in the medium term,” stated Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

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