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U.S. Treasury yields mostly retreated after data showed the annual headline inflation rate rising to an almost four-decade high of 7%, though coming in a bit below traders’ expectations.
The drop in most yields — other than the two- and three-year rates, which moved higher — flattened the spread between 2- and 10-year rates to 83 basis points and left one part of the curve teetering on inversion.
What are yields doing?
-
The 10-year Treasury note
TMUBMUSD10Y,
1.734%
yields 1.724%, compared with 1.745% on Tuesday at 3 p.m. Eastern Time. Yields rise as bond prices fall. -
The 2-year Treasury note
TMUBMUSD02Y,
0.902%
rate was at 0.899%, up slightly from 0.897% a day ago. -
The 30-year Treasury bond rate
TMUBMUSD30Y,
2.077%
stood at 2.064%, versus 2.072% on Tuesday afternoon. -
The 7-year Treasury note
TMUBMUSD07Y,
1.673%
was yielding 1.662%, down from around 1.691 % on Tuesday, FactSet data show. - The spread between 7- and 10-year rates continued to be on the verge of inversion.
What’s driving the market?
Consumer prices rose 0.5% in December to push the increase in the cost of living last year to a nearly 40-year high of 7%, with inflation soaring due to strong customer demand and labor and supply shortages.
The monthly gain in the consumer-price index exceeded the 0.4% forecast of economists polled by The Wall Street Journal, though the 7% annual headline figure came in a few basis points below the 7.03% anticipated by fixings traders earlier this week. It was the third straight month in which the year-over-year gain exceeded 6%.
Analysts said the data is expected to put more pressure on the Federal Reserve to begin shrinking the central bank’s more than $8 trillion balance sheet sooner than expected. On Tuesday, Jerome Powell, as part of his re-confirmation hearing for a second, four-year term as Federal Reserve Chairman, told lawmakers that policy makers would do what’s needed to combat persistently high inflation.
Later on Wednesday, investors will watch for a $36 billion of 10-year Treasury notes at 1 p.m.
A separate inflation reading, measuring producer prices, is scheduled for 8:30 a.m. on Thursday.
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What analysts are saying
- “A lot of traders were set up for the annual CPI rate to be even higher than it was,” Tom Graff, head of fixed income for Brown Advisory in Baltimore, said via phone. “Everybody priced in this level of CPI and then some.” Meanwhile, bonds had been “oversold” ahead of the data, creating a lack of selling pressure after the report was released, which then turned into a bit of a “minor relief rally.”
- “When the annual rate of inflation begins with a 7, there is immense pressure on the Federal Reserve to get it under control, supply chain issues notwithstanding,” Greg McBride, chief financial analyst at Bankrate, wrote in a note. “Both interest rate increases and not only stopping bond purchases but shrinking their balance sheet altogether are in the cards, and are likely to begin as soon as March.”
