Bond Yields Decline Ahead of U.S. Inflation Data

As traders await important U.S. inflation data on the horizon, bond yields experienced a decrease early Wednesday.

Key Highlights

• The yield on the 2-year Treasury (BX:TMUBMUSD02Y) dropped by 2.5 basis points to 4.342%. It’s crucial to note that yields move inversely to prices.
• The yield on the 10-year Treasury (BX:TMUBMUSD10Y) fell by 2.9 basis points, reaching 3.986%.
• Meanwhile, the yield on the 30-year Treasury (BX:TMUBMUSD30Y) also declined by 2.7 basis points to settle at 4.161%.

Market Dynamics

According to Stephen Innes at SPI Asset Management, bond markets were exhibiting a sense of “eerie calmness” as investors positioned themselves ahead of the December inflation report, scheduled for release on Thursday morning. This report is anticipated to serve as a significant trendsetter for the remaining part of the month.

Economists predict that annual headline CPI inflation, which gradually decreased from its multi-decade high of 9.1% in mid-2022, will marginally increase from 3.1% in November to 3.2% last month.

However, market focus is on the core reading, which excludes more volatile categories such as food and energy. This reading is projected to decrease from 4% to settle at 3.8%, thereby confirming the market’s prevailing expectations concerning the Federal Reserve’s future actions in upcoming policy meetings.

Markets Pricing in Fed Interest Rate Unchanged

According to the CME FedWatch tool, markets are currently indicating a 95.3% probability that the Federal Reserve will maintain interest rates within the range of 5.25% to 5.50% after its upcoming meeting on January 31st.

Rate Cut Possibility in March

There is a 65.7% chance that there will be at least a 25 basis point rate cut by the subsequent meeting in March. In fact, based on the 30-day Fed Funds futures, it is anticipated that the central bank will bring its Fed funds rate target back down to approximately 4% by December 2024.

Economic Updates and Treasury Auction

On Wednesday, there will be several U.S. economic updates, including wholesale inventories for November at 10 a.m. Additionally, New York Fed President John Williams is scheduled to speak in White Plaines, NY at 3:15 p.m.

Furthermore, the U.S. treasury plans to auction $37 billion of 10-year notes at 1 p.m.

Analyst Insight

Analysts at Saxo Bank noted that despite strong demand at yesterday’s 3-year U.S. Treasury auction, yields across maturities only experienced a slight decrease and failed to bring 10-year yields back below 4%.

Saxo Bank further added, “Today and tomorrow, the focus will be on the U.S. Treasury’s sale of 10-year and 30-year bonds, respectively. The auctions’ bidding metrics will be closely observed ahead of tomorrow’s CPI readings. The key question remains whether duration continues to be attractive despite the recent bond rally, especially considering that markets are already priced to perfection, reflecting expectations of six rate cuts this year.”