Treasury yields nudge lower as traders position ahead of inflation data


Bond yields fell early Wednesday as traders eyed important U.S. inflation data just over the horizon.

What’s happening

  • The yield on the 2-year Treasury
    dipped 2.5 basis points to 4.342%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    fell 2.9 basis points to 3.986%.

  • The yield on the 30-year Treasury
    lost 2.7 basis points to 4.161%.

What’s driving markets

Bond markets were showing an “eerie calmness”, according to Stephen Innes at SPI Asset Management, as investors established positions ahead of the December inflation report, due Thursday morning, that “is expected to be a primary trendsetter for the remainder of the month.”

Economists forecast that annual headline CPI inflation, which has been falling since hitting a multi-decade high of 9.1% in mid 2022, will inch up from 3.1% in November to 3.2% last month.

However, the core reading, which strips out more volatile items like food and energy, is expected to fall from 4% to 3.8%, and this figure is likely to confirm the market’s current viewpoint on what the Fed will do at coming policy meetings.

Markets are pricing in a 95.3% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on January 31st, according to the CME FedWatch tool.

The chances of at least a 25 basis point rate cut by the subsequent meeting in March is priced at 65.7%. Indeed, the central bank is expected to take its Fed funds rate target back down to around 4% by December 2024, according to 30-day Fed Funds futures.

U.S. economic updates set for release on Wednesday include wholesale inventories for November at 10. a.m. New York Fed President John Williams will speak in White Plains, NY at 3:15 p.m.

The U.S. treasury will auction $37 billion of 10-year notes at 1 p.m.

What are analysts saying

“Strong demand at yesterday’s 3-year U.S. Treasury auction drove yields slightly lower across maturities but failed to bring 10-year yields back below 4%,” said analysts at Saxo Bank.

“Today and tomorrow, the U.S. Treasury will sell 10-year and 30-year bonds, respectively. The focus will be on auctions’ bidding metrics ahead of tomorrow’s CPI readings. The big question is whether duration continues to be appealing after the recent bond rally despite markets [being] priced to perfection reflecting the expectations of six rate cuts this year,” Saxo added.

Las Vegas News Magazine

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