T-yields climb as early inflation optimism fades

US 10-year Treasury yields surged on Tuesday, reversing initial declines after economic data pointed to a slowing pace of rising inflation as investors now braced for the Federal Reserve’s policy announcement on Wednesday.

The consumer price index (CPI) showed an annual increase in prices of 4% in May, slowing from a 4.9% reading in April. On a monthly basis, CPI increased 0.1%, just shy of the 0.2% increase expected by economists.

Traders firmed up expectations the Fed will keep rates steady at the conclusion of its policy meeting on Wednesday and keep the benchmark rate at 5.0%-5.25%.

Expectations for the Fed to hold rates are now at 97.1%, up from 79.1% a day ago, but expectations for a 25 basis point hike at the July meeting are at 63.8%. according to most analysts, not only should the Fed skip tomorrow’s hike, they should just skip the entire meeting.

The data ever so slightly tilts things towards this not just being a skip, but a full-blown hold. But the early decline in yields was short-lived ahead of the Fed’s policy announcement and another reading on inflation in the form of the producer price index (PPI) for May.

A little bit of caution is seen coming back into the market. Maybe the optimism was a little premature. In addition, Bank of England Governor Andrew Bailey said official data published earlier in the day showed the labor market was “very tight” and food inflation was coming down very slowly, indicating the central bank will remain on a hiking path.

Central banks aren’t really correlated, but everybody is worried about the same inflation problem, letting inflation become entrenched and whether or not we really should be pausing.