The yield curve inverted further Friday as investors waited on key inflation data for August due Tuesday, after Federal Reserve Chairman Jerome Powell reiterated the U.S. central bank's priority is to tackle soaring price pressures.
Yields rose after Powell's comments Thursday, led by the more interest rate-sensitive shorter-dated notes, though benchmark 10-year yields have dropped from three-month highs reached Tuesday, which was largely driven by a deluge of corporate supply.
"Powell ... sounded hawkish," said Benjamin Jeffery, interest rate strategist at BMO Capital Markets in New York. "The most telling market reaction has been the flattening of the curve as we're moving towards the weekend."
Powell said the Fed is "strongly committed" to controlling inflation but there remains hope it can be done without the "very high social costs" involved in prior inflation fights. Tuesdays' Consumer Price Index (CPI) will be evaluated for any signs that price pressures might be easing.
It is expected to show that prices rose at an 8.1% pace over the year in August, compared with an 8.5% print for July. The data will come during a blackout period for Fed officials, which begins Saturday. The Fed is expected to hike rates by another 75 basis points at its Sept. 20-21 meeting. Even if price pressures come in below expectations, analysts see it as unlikely to sway the Fed from its path.
"Given the fact that the Fed has told us they want to take the data in its totality, it's challenging to envision a large enough disappointment on the CPI read that would take a 75-basis point hike off the table in September," said Jeffery.
The yield curve between two-year and 10-year notes flattened by 3 basis points to minus 23 basis points. The inversion is viewed as a reliable indicator that a recession is likely in the next one to two years.
Benchmark 10-year note yields were last 3.281%. They have risen from a four-month low of 2.516% on Aug. 2, but are holding below the 11-year high of 3.498% reached on June 14.
Two-year yields were last 3.500% and are holding below the 3.551% level hit Thursday, which was the highest since November 2007.
Thirty-year bond yields were at 3.451%, after reaching 3.515% on Wednesday, the highest since July 2014.
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