US 2-year yields touched the highest since February 2025
The Fed cut rates three times in the past year but two-year borrowing rates aren’t cooperating.
The two-year note yield touched 4.24% overnight, which is the highest since February 2025. The Fed cut rates in Sept, Oct and December of that year, lowering the Fed funds are to a range of 3.50-3.75%, where it remains.
Ian Lyngen, head of US rates strategy at BMO, writes that the market is wary of a July surprise in light of Warsh’s unwillingness to provide guidance.
The cheapening of the 2-year sector has been a consistent theme as investors remain focused on the July 29 FOMC meeting as potentially the timing for Warsh’s first rate hike. As it currently stands, the futures market has >8 bp of hikes priced in for this month’s meeting, giving a hike a one-in-three chance. Tuesday’s combination of CPI and Warsh will surely sway the probability in one direction or another – we’re biased to see the probability decline as a function of benign headline CPI and Warsh’s less-is-more approach to providing insight into the Fed’s current policy stance.
The CPI report on Tuesday is expected to show core rising 0.2% m/m and 2.8% y/y, with headline CPI declining to 3.8% from 4.2% y/y on falling fuel prices.
The latest re-engagement in Iran could unwind hopes of a retreat in oil prices in the months ahead. In addition, tight refining markets have kept fuel prices high despite the drop in crude oil.
Lyngen thinks the 8.7 bps priced into Fed funds is high.
This can be attributed to a couple of factors. First, there is presumably a risk that CPI surprises so dramatically on the upside that it would prompt the FOMC into rate hiking mode with unanticipated urgency simply in an effort to ensure price stability (and reestablish any perceived loss of credibility). Second, there is the potential that the reaction function at the FOMC has rapidly changed under Warsh’s leadership and the data seen during the last few months is sufficient justification to hike in the new regime. We’re skeptical of the latter rationale and will argue that the FOMC Minutes reinforced the Fed’s willingness to employ patience as its strategy this summer and take time to assess the performance of the real economy during the ongoing period of uncertainty.
Given that, we could see 2-year yields come under pressure over the remainder of the month.
Technically, we’re right on the edge of a breakout and that could see a challenge of the 2025 high of 4.40%.
This article was written by flc97fe4880a4b454993821fe0b770a597 at investinglive.com.