Treasury yields dip ahead of November CPI report

Bond yields fell early Tuesday amid tentative trading as investors awaited consumer inflation data.

What’s happening

  • The yield on the 2-year Treasury
    slipped by 2.6 basis points to 4.680%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    retreated 4.3 basis points to 4.193%.

  • The yield on the 30-year Treasury
    fell 4.3 basis points to 4.285%.

What’s driving markets

The benchmark 10-year Treasury yield has fallen about 80 basis points since hitting a 16-year peak just above 5% in October, pulled lower by expectations that cooling inflation will allow the Federal Reserve to cut interest rates next year.

Bond bulls will thus want to see the November CPI report, due on Tuesday at 8:30 a.m. Eastern, supporting the narrative of continued disinflation in the U.S. economy ahead of the Fed’s policy decision on Wednesday.

Economists expect the November headline month-on-month CPI to be unchanged, just like it was in October, and the annual rate to dip to 3.1% from 3.2%. However, the core CPI, which strips out volatile items like food and energy, is forecast to rise to rise 0.3% from 0.2%, and the annual rate to remain at 4%.

Ahead of the report, markets are pricing in a 98% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on Wednesday, and a 94% chance that it will do the same in January, according to the CME FedWatch tool.

The chances of at least a 25 basis point rate cut at the subsequent meeting in March is priced at 49.4%, up from 12.4% a month ago.

Traders also will be keeping an eye on a Treasury auction $21 billion of 30-year bonds at 1 p.m. Last month’s 30-year auction did not go very well, according to Henry Allen, strategist at Deutsche Bank, with investors demanding a yield of more than 5 basis points above the pre-sale level.

“That led Treasury yields to soar in the immediate aftermath, rising by over 21 basis points on the day at one point, before settling up 15 basis points. Clearly things have moved on since then with the massive bond rally, but it’s one to keep an eye on today,” said Allen.

The European Central Bank and Bank of England are expected to leave their policy rates unchanged on Thursday. Related: European Central Bank set to cut inflation forecast but hold rates steady

What are analysts saying

“[T]here is a widely held conception that core inflation is tumbling toward a 2% pace. Even at face value, that seems to exaggerate the degree of improvement,” said Stephen Stanley, chief U.S. economist at Santander.

“After back-to-back low readings in June and July that were driven mainly by steep drops in airfares, the core CPI has risen at a 3.4% annualized pace over the past three months. While this is a nice deceleration from where we were a year ago, it is nowhere near the range that would justify [the Fed] declaring victory,” he added.

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