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Bond Report: Two-year Treasury rate hits another 52-week high, while longer-dated yields drop despite stronger-than-expected U.S. inflation data

The two-year Treasury rate hit another 52-week high Wednesday , while long-end yields moved lower, after Wednesday’s release of stronger-than-expected inflation data for September.

The moves caused the widely followed spread between two- and 10-year rates to narrow, and indicated that bond traders see the risk of a policy error by the Federal Reserve down the road.

What are yields doing?
  • The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    1.540%

    declined 3.2 basis points to 1.549%, down from 1.579% at 3 p.m. Eastern on Tuesday. Yields and bond prices move in opposite directions. It was the largest-one day decline in almost two weeks.
  • The 2-year Treasury note yield
    TMUBMUSD02Y,
    0.358%

    rose 2 basis points was 0.368%, reaching another 52-week high, compared with 0.348% Tuesday afternoon. It was the highest level for the 2-year yield since March 24, 2020.
  • The 30-year Treasury bond yield
    TMUBMUSD30Y,
    2.035%

    declined 6.5 basis points to 2.041%, compared with 2.106% on Tuesday. It’s the lowest level since Oct. 1 and the largest one-day decline since Aug. 13.
What’s driving the market?

U.S. consumer prices rose at a 5.4% year-over-year pace in September and stayed at a 30-year high, according to data released on Wednesday. That’s above the 5.3% year-over-year consensus estimate of economists and more than double the Federal Reserve’s 2% average target.

On a month-over-month basis, the consumer price index rose 0.4%,  with higher prices for food, shelter and gasoline being the biggest drivers. That also was above the 0.3% month-over-month increase expected by economists polled by The Wall Street Journal. The core rate, which excludes food and energy, rose 0.2%.

Soon after the report, Treasury yields moved higher only to subsequently reverse course in longer-dated maturities. At various points in New York morning trading, even the 5-year rate was heading lower — a surprising development considering that yield should be reflecting the impact of the Fed’s forthcoming rate-hike cycle.

Meanwhile, the spread between 2- and 10-year yields narrowed by 5 basis points to around 118 basis points.

The CPI report may have reinforced fears in the market of persistently higher U.S. inflation that may force the Federal Reserve to raise its policy interest rates. However, those fears were being reflected Wednesday in lower, instead of higher, yields aside from the 2-year rate
TMUBMUSD02Y,
0.358%
.
Yields are often considered to be a reflection of the outlook, and tend to rise on expectations of interest-rate hikes from the Fed as long as the economy is still expected to perform well. The concern is that if the Fed tightens by too much in order to combat higher inflation, it could jeopardize the economic recovery.

Read: Stronger-than-expected U.S. inflation data has bond traders weighing the risk of a Fed policy error

Minutes of the Fed’s Sept. 21-22 meeting, released Wednesday, showed that policy makers discussed a plan to reduce asset purchases by $15 billion per month, but several of them preferred a more rapid reduction. Furthermore, the tapering process might begin in either mid-November or mid-December, the minutes showed.

Treasury’s $58 billion 30-year bond auction produced a “record-low dealer takedown,” according to Jefferies economists Thomas Simons and Aneta Markowska.

Fed Gov. Lael Brainard and Fed Gov. Michelle Bowman are both scheduled to speak after the market close on Wednesday.

What are analysts saying?
  • “The inflation numbers weren’t great and people think the Fed is not going to let inflation get out of hand,” said David Petrosinelli, a senior trader at InspereX in New York. “Right now, there are a basket of things going on. One of them is that the Fed’s hand may be forced to unwind QE purchases faster than Chairman Jerome Powell would like. The policy error would be that the Fed has waited too long to hike, and may be forced to hike by too much.”

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