Treasury Yields Rise After Higher Euro-Area Inflation

  • Some higher-than-expected inflation numbers coming out of Europe put Euro-area bonds on the defensive and Treasuries are following along in early trading domestically. The US is somewhat ahead of Europe in corralling inflation pressures but any disappointment on inflation readings globally gets Treasury traders nervous. Currently, the 10yr is yielding 3.95%, down 8/32nds in price, and the 2yr is at 4.84%, down 1/32nds in price. So far, the 4% support level in 10’s is holding but any surprising strength in upcoming economic releases will put that support to the test.


  • Speaking of economic releases, ISM Manufacturing will be released later this morning with a slightly better read expected for February vs. January (48.0 vs. 47.4). However, with expectations still below 50 the slowing in the manufacturing sector is expected to continue. That was vouched for yesterday by the Chicago-area PMI that missed expectations coming in at 43.6 vs. 45.5 expected and 44.3 in January.


  • As for the ISM Manufacturing Index the prices paid, employment, and new orders sub-indices will give us a more robust picture of the health and price pressure in the manufacturing sector. A regional survey, the Richmond Manufacturing Survey, yesterday printed the lowest sentiment since the pandemic lockdown period in 2020, so eyes will be on the ISM to see if that is a national trend.


  • Not surprisingly, the weekly look at mortgage applications disappointed, dropping -5.7% for the week and -58.7% YoY as both purchase and refi application activity fell. The current 30yr mortgage rate has tracked Treasury yields higher in February with the latest week at 6.71%. At the beginning of February that rate was 6.18%, so the dip in activity seems reflects an inflection point around that 6% level. As it drifts towards the low 6% range, activity picks up and as it moves north mortgage activity falls off significantly.


  • Outside of the weekly jobless claims number tomorrow (195k expected vs. 192k the prior week), the ISM Services Index on Friday remains the next big release for February. While the manufacturing sector has been contracting recently, the services sector continues to post solid results as reflected in both personal consumption and inflation readings. The index is expected to print a 54.5 vs. 55.2 (see graph below).


  • Fed speak will continue to influence headlines for the balance of the week with five members still scheduled to deliver their thoughts by Friday. Minneapolis Fed President Neel Kashkari is speaking this morning and again tomorrow. He’s notable because not too long ago he was quite the dove, but has turned into one of the uber-hawks calling for a mid-5% terminal rate in recent comments, so expect more of the same today is how I would play it.

ISM Manufacturing and Non-Manufacturing Indices


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.64 5.40 5.31 5.27 5.29 5.75
0.50 5.62 5.37 5.25 5.16 5.15 5.64
1.00 5.62 5.34 5.22 5.12 5.06 5.51
2.00 5.33 5.16 5.04 4.94 NA
3.00 5.00 4.88 NA
4.00 4.83 NA
5.00 4.80 NA
10.00 NA

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Published: 03/01/23 Author: Thomas R. Fitzgerald