US Treasury yields edged lower on Tuesday, with the 2-year T-note yield falling nearly five basis points to 4.193% and the 10-year benchmark note dropping six basis points to 4.635%. The 10-year Treasury yield also fell four basis points to 4.69% and the 30-year fell six basis points to 5.21% on Monday. This decline was attributed to several factors including positive developments in the Middle East easing inflation fears and pushing oil prices lower, and the US Treasury Department's decision to extend its bond buyback program to curb the US 30-year yield. Investors are closely monitoring the bond market after a volatile week where 30-year borrowing costs reached nearly twenty-year highs, prompting the Treasury's intervention with expanded buybacks, which some, like Nohshad Shah of Citadel Securities, called "financial repression at the margin."
Market participants are now keenly focused on the release of the Federal Reserve’s preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index, on Wednesday. The Bureau of Economic Analysis is set to release its Personal Income and Outlays report for July at 8:30am Eastern (12:30pm GMT). FactSet consensus forecasts headline PCE to rise 0.07% month-on-month, a rebound from June's 0.11% decline, and the year-on-year rate to ease to 3.6% from 3.7%. Core PCE, which excludes volatile food and energy prices, is expected to rise 0.18% month-on-month, with year-on-year estimates ranging from holding at 3.3% to easing slightly to 3.2%. Natixis chief US economist Christopher Hodge anticipates headline PCE to remain unchanged at 3.70% year-on-year due to upward pressure from AI and data center investment.
This PCE data is particularly significant as it precedes Fed Chair Kevin Warsh's first Jackson Hole keynote address as chair, scheduled for Friday. Warsh, who has provided scant forward guidance since May, is expected to address the central bank's approach to inflation and the Treasury's efforts to reduce long-term yields. Geoff Yu, a senior market strategist at BNY, highlighted that investors are eager to understand how the Fed will respond to the Treasury's actions, given the continued volatility in long-end bonds. The interplay between Treasury Secretary Scott Bessent's goal of lowering yields to reduce the deficit and Warsh's focus on inflation is a key area of concern.
The market's reaction to the PCE data is anticipated to follow conventional patterns. A softer-than-forecast core reading would likely boost equities, particularly growth and technology stocks, while weighing on the dollar and lifting gold, as expectations for further Fed tightening would diminish. Conversely, a hotter-than-expected print would likely push Treasury yields higher, pressure growth stocks, strengthen the dollar, and prompt profit-taking in gold, reinforcing the hawkish case for potential rate hikes. If core PCE is higher than 3.3% year-on-year, it could significantly increase expectations for a September Fed rate hike and cause gold to fall towards $4,600 or $4,530, while a reading below 3.3% could see gold challenge $4,700 and even $4,800.
