Bond Report: 10- to 30-year Treasury yields lead drop after U.S. inflation gauge shows signs of cooling


U.S. bond yields fell on Thursday after the October personal consumption expenditure index pointed to signs of easing price pressures and as investors continued to assess Federal Reserve Chairman Jerome Powell’s comments on Wednesday about the next interest rate hike in less than two weeks.

What’s happening

The yield on the 2-year Treasury

slipped to 4.335% from 4.372% on Wednesday.

The yield on the 10-year Treasury

plunged to 3.604% from 3.699% on Wednesday afternoon.

The yield on the 30-year Treasury

fell to 3.725% from 3.821% as of late Wednesday.

What’s driving markets

Data released on Thursday showed that the Fed’s preferred inflation gauge eased slowly in October. The personal-consumption expenditures index rose a modest 0.3% that month, and the yearly rate of inflation slowed to 6% in October from 6.2% in the prior month. 

The report was enough to push Treasury yields lower across the board in morning trading, as traders factored in a reduced likelihood of another 75-basis-point rate hike by the Fed on Dec. 14.

Two-year Treasury yields, which are particularly sensitive to monetary policy moves, fell as investors also continued to react to Wednesday’s comments by Powell, who said that policy makers could slow the pace of interest rate increases as soon as their Dec. 13-14 meeting. Those remarks were interpreted as being less hawkish than expected.

Markets are now pricing in a 79% probability that the Fed will raise interest rates by 50 basis points to a range of 4.25% to 4.50% on Dec. 14, according to the CME FedWatch tool. The central bank is also mostly expected to take its fed-funds rate target to at least between 4.75% and 5% by March.

Other U.S. data released on Thursday showed that initial jobless claims fell 16,000 to 225,000 for the week that ended Nov. 26, versus the decline of 5,000 that economists had expected. Later in the day, Fed Vice Chair Michael Barr is set to speak at the American Enterprise Institute at 3 p.m. Eastern time.

U.K. 10-year gilt yields

fell 5 basis points to 3.117% after a survey from Nationwide, the mortgage lender, showed house prices falling in November by the most since the height of the pandemic.

What are analysts saying

“The market’s reaction to Powell’s speech strikes us as at least mildly surprising considering the Chairman essentially repeated the message from the November FOMC meeting,” said BMO Capital Markets strategists Daniel Krieter and Daniel Belton. “More than anything else, the response is indicative of the market’s predisposition to trade incoming information as suggestive of a pivot in central bank policy.” 

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