U.S. Treasury yields were little changed Tuesday morning as markets took a breather while investors waited for progress on an infrastructure bill in Congress, which was set for a vote possibly later in the morning session.

What yields are doing

The 10-year Treasury note yields
TMUBMUSD10Y,
1.344%

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

The 30-year Treasury bond yields
TMUBMUSD30Y,
1.984%

1.985%, versus 1.962% a day ago.

The 2-year Treasury note yields
TMUBMUSD02Y,
0.224%

0.228%, compared with 0.220% on Monday.

What’s driving the market?

Yields remained little changed Tuesday after the release of data showing that U.S. small business optimism retreated in July. The confidence index dropped 2.8 points to 99.7 last month after hitting the highest level since the November election in June.

Looking ahead, the Senate could pass the $1 trillion bipartisan infrastructure bill later Tuesday. The proposal includes nearly $550 billion in spending on transportation, utilities and broadband internet.

The spending package is likely to be parsed for further details on how it might add to federal debt and impact Treasury borrowing to help cover the costs of the infrastructure initiatives, which could nudge yields higher.

Also on deck for today, fixed-income investors will watch for an auction of $58 billion in 3-year Treasurys
TMUBMUSD03Y,
0.436%

at midday, as well remarks by two Federal Reserve policy makers. Cleveland Fed President Loretta Mester is slated to speak about inflation and risks, at a virtual event later Tuesday. Chicago Fed president, Charles Evans, speaks at 2:30 p.m. ET to discuss the economy and monetary policy.

Late Monday, Boston Fed president Eric Rosengren said the Fed should announce in September that it will begin reducing its $120 billion in monthly purchases of Treasury and mortgage bonds “this fall.”

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

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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