Bond Report: 2- and 10-year Treasury yields head for biggest one-day drops in over a decade after October inflation data

What’s happening

• The yield on the 2-year Treasury
  TMUBMUSD02Y,
  4.294%
  slipped to 4.324% from 4.628% on Wednesday.

• The yield on the 10-year Treasury
  TMUBMUSD10Y,
  3.840%
  retreated to 3.855% from 4.149% late Wednesday.

• Based on their moves earlier in the New York session, the 2- and 10-year Treasury yields were on track for their biggest one-day declines since September 2008 and March 2009, respectively, based on Dow Jones Market Data.

• The yield on the 30-year Treasury
  TMUBMUSD30Y,
  4.095%
  fell to 4.1% from 4.317% Wednesday afternoon.

What’s driving markets

U.S. inflation showed signs of cooling in Thursday’s consumer-price index report for October, with the cost of living rising a relatively modest 0.4% in October. Economists polled by The Wall Street Journal had forecast a 0.6% increase in the consumer price index.

The yearly rate of inflation slipped to 7.7% from 8.2%, marking the lowest level since January, and the so-called core rate of inflation that omits food and energy rose just 0.3% for the month. Wall Street had forecast a 0.5% gain.

The report could keep the Federal Reserve on track for a half-percentage-point interest-rate increase in December, even as policy makers consider higher rates in 2023 than they had previously expected, The Wall Street Journal reported.

After Thursday’s CPI report, fed-funds futures traders were pricing in an 81% chance that the Fed will raise its benchmark interest rate by 50 basis points to a range of 4.25% to 4.50% on Dec. 14. Meanwhile, the probability of a 75 basis point hike sank to 19% versus 43% on Wednesday.

Traders also pulled back a bit on how high they see the Fed taking rates in the first half of 2023, with expectations now mostly in a range between 4.75% and 5%, according to the CME FedWatch tool.

Tensions in the bond market were evident on Wednesday, when a $35 billion auction of 10-year paper was badly received, with a bid/cover ratio of 2.23 the weakest since August 2019, according to Jefferies economists.

What analysts are saying

“October finally provided some glimmers of hope for softening inflation,” said Jason Pride, chief investment officer of private wealth at Glenmede. “Still, we suspect that the Fed may see one month as not providing that big of a shift or that consistent of a trend, when its goal is to bring inflation back to 2%. As a result, the Fed will now more likely hike rates by only 50 basis points in December and wait for confirmation of this trend in further reports to determine its long-term path.”