Yields slip as investors brace for US inflation data

NEW YORK: US long-dated Treasury yields slipped on Tuesday in quiet, rangebound trading, as investors looked to Wednesday's US inflation report that could shed more light on the pace of future interest rate increases by the Federal Reserve.

Economists expect a 0.3 percent rise in inflation in January and a core figure of 0.2 percent, according to a Reuters poll.

Investors started to worry more about inflation after a prolonged period of stagnant price gains, spooked by robust wage increases of 2.9 percent in the January US jobs report, and its impact on borrowing costs.

That caused sharp volatility in the stock market.

"We're kind of in a wait-and-see mode for tomorrow's US CPI (consumer price index) report," said Kim Rupert, managing director of global fixed income at Action Economics in San Francisco.

"There's enough uncertainty with the (inflation) data to suggest that the average hourly earnings were a one-off thing and maybe the Fed won't be as aggressive as many fear. I think the market over-reacted a little bit," she added.

US 10-year yields, which move inversely to prices, have risen about 43 basis points so far this year. US 30-year yields are on a similar path, climbing 39 basis points in 2018.

Part of the run-up, however, was not all due to events in the United States, analysts said.

TD Securities interest rates strategist Gennadiy Goldberg said global central banks such as the European Central Bank and Bank of England have started to normalize their monetary policies, pushing yields higher. That has spilled over to the US Treasury market.

"There is a global re-pricing of the quantitative easing trade," Goldberg said.

Analysts have lifted their yield forecast for both US 10-year Treasuries and 10-year German Bunds.

Danske Bank said in a research note that it believes the rapid rise in yields is slowing down, but they remain on an upward track as the global cyclical recovery continues.

It expects the 10-year Treasury yield to rise to 3.3 percent on a 12-month horizon, while 10-year Bunds could climb to 1.2 percent, from the current 0.73 percent.

In late trading, US 10-year yields fell to 2.840 percent from 2.855 percent late on Monday. US 10-year yields hit 2.902 percent on Monday, the highest since January 2014.

US 30-year bond yields fell to 3.128 percent, from Monday's 3.136 percent. The yield on the maturity touched an 11-month peak of 3.139 percent on Monday.