Treasury Yields Jumped Ahead of October’s CPI Inflation Data on Tuesday

Yields across various Treasury durations, ranging from two to 30 years, experienced an increase on Monday morning in anticipation of forthcoming data related to consumer and producer prices.

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Here's a breakdown of the key changes:

• The 2-year Treasury yield (BX:TMUBMUSD02Y) rose by 5.3 basis points, reaching 5.075% compared to 5.022% on the previous Friday.
• The 10-year Treasury yield (BX:TMUBMUSD10Y) increased by 5 basis points, reaching 4.679% from 4.629% on Friday.
• The 30-year Treasury yield (BX:TMUBMUSD30Y) saw a modest advance of 1.3 basis points, reaching 4.790% from 4.777% on the preceding Friday.

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Market forces are being influenced by optimism that recent indications of an economic slowdown may alleviate inflationary pressures. This optimism centers around the potential for the Federal Reserve to conclude its series of interest rate hikes. The veracity of this optimism will be tested in the upcoming days with the release of the October consumer price index (CPI) report on Tuesday and producer prices data scheduled for Wednesday.

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In terms of expectations for the CPI report, the year-on-year core number, excluding volatile elements like food and energy, is anticipated to remain unchanged at 4.1%. However, the headline rate is predicted to decrease to 3.3% from the September figure of 3.7%.

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The market is currently factoring in an 85.9% probability that the Federal Reserve will maintain interest rates within the range of 5.25% to 5.5% on December 13, as per the CME FedWatch Tool. Additionally, there is a 26% likelihood, up from 14.8% the previous week, of a 25-basis-point rate hike to a range of 5.5% to 5.75% by January.

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Analysts from BMO Capital Markets, Ian Lyngen, and Ben Jeffery, remarked on the ongoing consolidation in the U.S. rates market as investors await the release of the CPI data on Tuesday.

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According to them, while the CPI data is not expected to significantly alter the Fed's stance on a potential pause in December, an unexpected uptick in inflation could potentially push rate cut forecasts further into 2024. They maintain the perspective that the market is discounting Federal Reserve Chair Jerome Powell's hawkish resolve and the committee's inclination to maintain a restrictive policy stance despite signs of the real economy slowing, potentially to the point of contraction.