The worst week for the Treasury market in 2023 saw investors come to terms with the possibility that the Federal Reserve will have to keep interest rates higher for longer as it fights inflation.
Wall Street has rebalanced bets on the Fed's peak rate to around 5.2%, up from under 5% earlier this month, following a barrage of hawkish remarks from US officials in the aftermath of a strong jobs report. That is not all. Traders who had expected the central bank to raise rates only once more — in March — are now confronted with bets on at least three more rate hikes.
As a result, Tuesday's consumer price index is seen as a litmus test for the Fed's ability to keep inflation under control during the most aggressive tightening cycle in decades. According to Ian Lyngen of BMO Capital markets, core CPI will either highlight the obvious need for the Fed to push further into restrictive territory or reflect progress towards securing the anchor of inflation expectations.
Treasury 10-year yields have risen to around 3.75%. Friday's interest-rate options activity included a large, seemingly new position that will profit if the rate reaches 4% within a week. The rise in yields had a significant impact on the technology sector, with the Nasdaq 100 underperforming major indices. The S&P 500 ended the week with a small gain, but it was its worst week since December.