Treasury Yields Rise as China Optimism Spurs Risk Appetite

Bond yields experienced an upward trend on Tuesday as positive remarks about China’s economic outlook diminished the demand for Treasury bonds. The global market sentiment displayed a slightly more favorable attitude towards risk, while optimistic comments from China’s premier further contributed to the reduced interest in sovereign bonds, consequently pushing Treasury yields higher.

Today’s economic updates in the United States include the release of May’s durable goods orders at 8:30 a.m. Eastern, followed by the S&P Case-Shiller home price index for April at 9 a.m., and May’s new home sales at 10 a.m. Moreover, investors eagerly await the June consumer confidence reading, alongside Friday’s crucial Personal Consumption Expenditures (PCE) inflation indicator, which is closely monitored by the Federal Reserve to gauge price momentum.

According to the CME FedWatch tool, the market is currently pricing in a 77% probability of a 25 basis point interest rate hike by the Federal Reserve during its July 26 meeting, bringing the range to 5.25% to 5.50%. However, the central bank is not anticipated to return its Fed funds rate target to around 5% until April 2024, as indicated by 30-day Fed Funds futures.

Saxo Bank highlighted that sovereign bond prices in the United States and Germany had increased on Monday due to concerns about weakening business confidence in Germany. Despite this rally, the U.S. Treasury sold 2-year notes at the highest yield since February, the second-highest since 2007. Saxo strategists expect yields in the U.S. and Germany to rise this week, particularly during the Sintra forum where central bankers are likely to emphasize their determination to combat inflation. They predict a resumption of the rise in the front part of the yield curves, reaching approximately 5% in the U.S. and 4% in Germany, while long-term yields remain influenced by lackluster growth data.