U.S. Treasury yields rose across the curve in February as new data reflected a resilience in the economy that was not widely anticipated by investors. The belly of the curve rose the most, with the 5- and 10-year U.S. Treasury yields jumping 58 and 44 basis points (bps), respectively.

Employment data surprised the market to start the month, with 517,000 jobs added vs 188,000 expected, coupled with a 54-year low in the unemployment rate which fell to 3.4%. The January CPI report drove the next move higher in yields, as service inflation continued to accelerate. Retail sales came in hot at 3% versus the 2% expectation – a strong number even after adjusting for inflation.

Weather and seasonal adjustments can add noise to January economic data; however, the consistency across data to start the year points to a resilient labor market and sticky inflation, which may result in more tightening from the Fed. The market is coming to terms with a “higher for longer” Fed policy, pricing in three additional 25 bps hikes in 2023 and pushing rate cut expectations out to 2024.

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