6-month T-bill rate goes above 5%, 1-year rate sits on the edge after January CPI

The rate on 6-month T-bills rose above 5% on Tuesday, a level last seen in 2007, after the U.S. January’s consumer price index report revealed signs of sticky inflation that’s likely to keep the Federal Reserve hiking rates for longer than expected.

The counterpart 1-year rate sat on the edge of reaching 5%, while yields on 2- through 10-year Treasurys also rose. The pace of advances in yields was stronger in shorter-term maturities — pushing the Treasury curve further below zero. The spread on 2- and 10-year Treasury yields briefly touched minus 89 basis points after the report.

What’s happening
  • The yield on the 2-year Treasury
    rose to 4.588% from 4.534% on Monday.

  • The yield on the 10-year Treasury
    advanced to 3.727% from 3.716% Monday afternoon.

  • The yield on the 30-year Treasury
    fell to 3.76% from 3.790% late Monday.

Two-year U.S. government bond yields, which are particularly sensitive to monetary policy, have risen sharply in recent sessions following more hawkish Federal Reserve rhetoric and upbeat economic news.

What’s driving markets

Data released on Tuesday showed the annual headline CPI inflation rate slowed to 6.4% in January from 6.5% in December — the lowest level in 15 months, but still above the 6.2% median estimate of economists. The increase in the core reading — which strips out particularly volatile items like food and energy — tapered to 5.6% over the past 12 months from 5.7%, though still also came in above expectations.

Meanwhile, the cost of living rose 0.5% in January on a monthly basis, the biggest increase in three months, in a sign that inflation is remaining stickier than expected.

The report drove short-term yields higher as traders factored in a higher-for-longer outlook on interest rates. The 6-month T-bill rate rose to 5.028% as of Tuesday morning, and hasn’t ended the New York session at that level since July 2007, according to Tradeweb.  The last time the 6-month yield went above 5% on an intraday basis and finished at 5% or higher was on Aug. 8, 2007. Meanwhile, the 1-year T-bill rate hovered around 4.954% on Tuesday morning.

Richmond Federal Reserve President Tom Barkin, speaking in a Bloomberg television interview, said he expects inflation to have “a lot more persistence” than everyone wants.

Traders expectations for the Fed’s next rate hike on March 22 solidified around another 25 basis points, which would lift the fed funds target range to between 4.75% and 5%, according to the CME FedWatch tool. Fed funds futures traders also see a decent chance that the target could go above 5.2% later this year, according to 30-day Fed Funds futures.

What analysts are saying

“The Fed’s reaction to this report is probably not all too dissimilar to Kobe Bryant’s quote after Game 2 of the 2009 NBA Finals: ‘What’s there to be happy about? Job’s not finished,’ ” said Jason Pride, chief investment officer of private wealth at Glenmede, which manages $40.5 billion in assets. “The Fed still has much progress to make in taming inflation before it can conclude this ongoing tightening cycle. Next up, is likely another quarter-point rate hike at the March FOMC.”

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