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Bond Report: Treasury yields end higher for second straight week after U.S. consumer-sentiment data

Treasury yields traded mixed on Friday, while posting their second straight week of advances, after data showed a rise in U.S. consumer sentiment for August and as investors continued to digest the latest inflation readings.

What yields are doing

The yield on the 2-year Treasury note
TMUBMUSD02Y,
3.260%

was up 3 basis points at 3.257% from 3.227% at 3 p.m. Eastern on Thursday, and rose less than 1 basis point on the week. It is up 36 basis points over the past two weeks, based on 3 p.m. data from Dow Jones Market Data.

The 10-year Treasury yield
TMUBMUSD10Y,
2.845%

fell 3.8 basis points to 2.848% from 2.886% Thursday afternoon. It rose 1 basis point this week.

The 30-year Treasury bond yield
TMUBMUSD30Y,
3.111%

was down 4 basis points at 3.117% after factoring in new issue levels. It rose 5.2 basis points for the week.

What’s driving the market

Data released on Friday showed that falling gas prices have helped to improve the public’s mood, with U.S. consumer sentiment rising to 55.1 in August from 51.5 in July and one-year inflation expectations dropping to 5% this month from 5.2% last month, based on a University of Michigan survey. Meanwhile, U.S. import prices declined in July for the first time this year, by 1.4%.

It was a strange week in which investors and traders from various asset classes came away with different interpretations about the path ahead after this week’s U.S. inflation data.

Read: U.S. consumer price inflation surprises to downside in July and U.S. producer prices downshift for first time since 2020 recession

Improving inflation figures boosted some hopes that the Federal Reserve would not need to raise interest rates as aggressively as feared, potentially leaving room for policy makers to rein in still red-hot inflation without sending the economy into recession. That buttressed the view that policy makers might have an opening to engineer a soft landing.

Yet inflation still remains so high that bond traders have dismissed the stock market’s recent rally and are still signaling the possibility of an economic downturn. The spread between 2- and 10-year Treasury yields — seen as a usually reliable recession warning signal if sustained — remained deeply inverted at minus 41 basis points as the shorter-dated yield rose and the 10-year rate dropped on Friday.

What analysts say

“Fed rate increases must continue. Inflation risks still far outweigh the good news,” said FHN Financial’s chief economist Chris Low. “Nevertheless, the July CPI was a step in the right direction following months of movement in the wrong direction. That much is worth celebrating.”

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