Bond Market Looks to Inflation Data to Back Steeper Yield Curve

(Bloomberg) — Bond investors are driving a wedge into the Treasury market in anticipation of slower economic growth and faster inflation, spurring demand for shorter-term Treasuries at ever-lower yields while longer-term yields drift higher. The next test comes with Friday data expected to show inflation remains elevated.

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Five-year yields fell eight basis points last week, breaching 4% after Federal Reserve policymakers lowered their forecasts for US economic growth, bolstering wagers on interest-rate cuts this year. As 30-year bond yields climbed on Friday, they exceeded five-year yields by nearly 60 basis points, the widest margin since September.

A highlight of this week’s busy economic data calendar is personal income and spending data for February, on Friday. The report includes the inflation gauge the Fed aims to have average 2% over the long run. It was 2.5% in January and economists expect it to remain there, while the core rate excluding food and energy is seen accelerating to 2.7% from 2.6%.

This week also brings the last Treasury coupon auctions of the month — a combined $183 billion of new two-, five- and seven-year notes.

What to Watch

• Economic data:

  • March 24: Chicago Fed national activity index; S&P Global US manufacturing and services PMIs

  • March 25: Philadelphia Fed non-manufacturing activity; S&P CoreLogic home prices; new home sales; Conference Board consumer confidence survey; Richmond Fed manufacturing & business conditions

  • March 26: MBA mortgage applications; durable goods orders

  • March 27: 4Q GDP (final revision); wholesale and retail inventories; advanced trade balance; initial and continuing jobless claims; pending home sales; Kansas City Fed manufacturing activity

  • March 28: Personal income and spending; Kansas City Fed services activity

• Fed calendar:

  • March 24: Atlanta Fed President Raphael Bostic; Fed Vice Chair Michael Barr

  • March 25: Fed Governor Adriana Kugler; New York Fed President John Williams

  • March 26: Minneapolis Fed President Neel Kashkari; St. Louis Fed President Alberto Musalem

  • March 27: Richmond Fed President Tom Barkin

  • March 28: Barr; Bostic

• Auction calendar:

  • March 24: 13- and 26-week bills

  • March 25: 6-week bills; two-year notes

  • March 26: 17-week bills; two-year floating-rate notes; five-year notes

  • March 27: 4- and 8-week bills; seven-year notes