U.S. Treasury yields ended higher on Tuesday as the U.S. Senate passed a $1 trillion bipartisan infrastructure bill, which calls for $550 billion in new public-works spending above what already was expected in future federal commitments.

What yields are doing

The 10-year Treasury note yields

1.342%, compared with 1.316% at 3 p.m. Eastern Time on Monday.

The 30-year Treasury bond yields

1.984%, versus 1.962% a day ago.

The 2-year Treasury note yields

0.236%, compared with 0.220% on Monday.

What’s driving the market?

Yields closed higher Tuesday after the U.S. Senate voted 69-30 Tuesday to approve the bipartisan infrastructure bill, a move that sends the $1 trillion measure over to the House of Representatives for its approval.

The bill includes $110 billion for roads, bridges and other projects — as well as $66 billion for rail, $65 billion for broadband internet and $55 billion for water systems. Sources of funding for the measure include $205 billion from existing COVID-19 relief funds and an estimated $28 billion from new tax-reporting requirements on cryptocurrencies.

In other developments Tuesday, data showed that U.S. small business optimism retreated in July. The confidence index, based on a survey released by the National Federation of Independent Business, dropped 2.8 points to 99.7 last month after hitting the highest level since the November election in June.

An auction of $58 billion in 3-year Treasurys

produced “solid” results, “but only after a dramatic cheapening of this point on the curve,” Jefferies economists Thomas Simons and Aneta Markowska wrote in a note.

For the week, investors are awaiting the U.S. July consumer price index data due Wednesday, followed by the July producer price index due Thursday.

What analysts are saying

Tomorrow’s CPI report is important because another outsized number “will test still-subdued inflation expectations among households and investors,” Gary Schlossberg, global strategist at Wells Fargo Investment Institute, said via phone. He said his firm expects year-over-year readings to come in close to 5.5% for the rest of this year before moderating in 2022, and is “betting that any changes to long-term inflation expectations affecting the bond market will be adjusted in a gradual process.” “For me, the real test for longer-term inflation expectations will come with slowing growth and a less highly charged economy and labor market,” he says. For now, any future tapering of bond purchases by the Fed, even with elevated inflation rates, “will likely be enough to placate investors.”

Wednesday’s CPI release matters because “if we get another year-over-year reading around 5%, we are going to see immense pressure on the Fed to tighten,” said Fergus Hodgson, director at Econ Americas, a research and asset management firm. Though his base case is for the U.S. to return to 2.6% or 3% inflation readings by year-end, the risk of a stagflation outcome in the U.S. is “serious” and underappreciated in the markets, he said via phone. Any tapering of the Fed’s bond purchases would still be expansionary for monetary policy, and the risk is that “you make permanent rising inflation expectations, which are going to be difficult to turn around.” 

“A period of consolidation in the wake of a significant repricing is a very typical trading pattern in Treasuries. The process of establishing a volume bulge around the 200-day moving-average is ultimately constructive on the prospects for the bullish tone to be retained,” BMO Capital Markets strategists Ian Lyngen and Ben Jeffery wrote in a Tuesday research note. They said they “suspect justification for higher yields won’t be in the offing until after Labor Day—when investors have a better sense of the back to school, back to the office dynamic.”

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