Treasury Yields Edge Higher as Investors Grapple with Mixed Economic Signals

Treasury yields edged higher last week, reflecting investor uncertainty amidst mixed economic data and anticipation of the Federal Open Market Committee's (FOMC) upcoming policy decision, says Raymond James in its latest report. Yields on the intermediate to long end of the curve rose between 3 and 6 basis points, mirroring the year's trend of indecisiveness as investors attempt to interpret economic signals and predict the Fed's next move.

The release of the Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, revealed a slightly higher-than-expected year-over-year increase of 2.7%, underscoring the persistent challenge of sticky inflation. Conversely, Gross Domestic Product (GDP) growth fell short of expectations at 1.6%, down from the previous quarter's 3.4%. Despite this, consumer spending remained strong, and corporations continued to exceed earnings expectations, creating a mixed picture of economic performance.

"The battle reflecting robust versus deficient data continues and so does volatility as investors corral and interpret data attempting to get ahead of the curve’s directional move," Raymond James points out.

This week, the FOMC is expected to leave Fed policy unchanged. However, Friday's payroll data release could significantly impact market movement if it deviates substantially from expectations.

Municipal bond yields also increased last week, with the municipal curve remaining upward-sloping between 10 and 30 years. This presents attractive tax-equivalent yields, particularly for investors in higher tax brackets seeking longer-term investments. Corporate bond yields remained relatively stable despite spread narrowing, with yields staying elevated compared to other fixed-income products in the short-to-intermediate part of the yield curve.

CD rates saw a mostly upward trend, with an increase in both the number of issuers and available CDs. Yields on CDs with maturities between 3 months and 5 years averaged 5.157%, slightly higher than the previous week.

"This week the Federal Open Market Committee meets for the third time this year with their policy announcement on Wednesday. It is largely anticipated that they will leave Fed policy unchanged," notes Raymond James. "The payroll data released on Friday may be the more impactful market mover should it reflect any meaningful divergence from expectations."