(Bloomberg) -- The bond market has resumed pricing in better-than-even odds of a Federal Reserve rate hike next week, following Monday’s historic collapse in yields fueled by speculation that a spate of bank failures in the past week would stay the central bank’s hand.
The repricing was underway before the release of February inflation data that was was mostly in line with expectations, and the data had little lasting effect. The two-year Treasury yield, which tumbled 61 basis points on Monday, was higher by 31 basis points on the day after erasing more than half of Monday’s move at one stage.
Swaps traders upgraded the odds of a Federal Reserve rate hike next week to around 80% from around 50% at Monday’s close. Those odds only briefly edged higher after the core consumer price index rose slightly more than economists estimated, while still showing slower year-on-year rates compared with January.
“The way financial markets are performing early today, in tandem with the data, should add to the probability of a 25 basis point hike in March, but only at margins,” said Alan Ruskin, chief international strategist at Deutsche Bank (ETR:DBKGn).
The Treasury market in the past week has undergone a seismic shift, with two-year yields reaching a multi-year high of 5.08% on Wednesday after Fed Chair Jerome Powell said he was open to re-accelerating the pace of rate hike’s from January’s quarter-point increase if warranted by economic data.
Monday, the two-year yield dipped below 4% as investors continued to dump US bank shares despite a rescue plan announced by regulators late Sunday, and touched 3.82% in early European trading, breaching its 200-day moving average for the first time since mid-2021. Bank share prices rebounded in early trading Tuesday.
Meanwhile inflation continues to run much hotter than the Fed’s 2% target rate. The consumer price index rose 6% year-on-year in February, down from 6.4% in January. The core CPI eased to 5.5% from 5.6% despite rising 0.5% for the month, a tenth more than economists estimated.
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