US 10-year yield drops to two-month lows; US two-year rates drop to two-week lows; US core CPI rises less than anticipated. May 2024 rate reduction in US rate futures pricing (adds commentary, changes prices) Composed by Gertrude Chavez-Dreyfuss Nov. 14, New York (Reuters) – Tuesday saw a sharp decline in U.S. Treasury yields as the market braced for rate reduction in the first half of next year following October’s softer-than-expected consumer inflation statistics, which suggested the Federal Reserve may be done raising interest rates. Interest rate expectations were reflected in U.S. two-year rates, which fell to two-week lows of 4.815% and were last down 22 basis points (bps) at 4.819%. The yield was expected to decline by the most each day since May.
With prices moving in the other direction, the benchmark 10-year yield dropped to a two-month low of 4.432% and was last trading down 18.7 basis points at 4.443%. It is expected to record the largest one-day loss since March. U.S. bonds with maturities of 20 and 30 months, as well as notes with maturities of five, seven, and two years, all fell to two-month lows. The decreases followed data showing that the core rate increased by 0.2%, less than expected, while the U.S. consumer price index (CPI) remained constant in October despite reduced petrol costs. The consumer price index had a 0.4% increase in September before remaining constant. The CPI grew 3.2% annually following a 3.7% increase in September.
According to Reuters surveyed economists, the CPI would rise by 3.3% annually and by 0.1% monthly. According to Ryan Swift, a U.S. bond analyst at BCA Research in Montreal, “this morning’s report strengthens our conviction that the Fed is done tightening and that Treasury yields have peaked for the cycle.” Swift made these observations in a research note. “This opinion is now supported by the market consensus. The market must price in more easing than the 84 basis points (bps) that are now discounted for the next 12 months if Treasury rates are to decline much more, he continued. The likelihood of a rate decrease in May of next year was placed into U.S. rate futures on Tuesday at 65%, up from 34% late on Monday.
based on the FedWatch tool from the CME. The so-called “supercore” inflation index, which accounts for services other than housing and energy expenses, was only 0.2% for the month, bringing the annual rate down to 3.75%. Because of the significant impact that tight labour markets and wages have on this indicator, the Fed monitors it. The yield curve somewhat narrowed in other areas of the bond market, with the difference between the US two-year and 10-year rates closing at minus 37.80 basis points as of this writing, down from minus 39.90 basis points on Monday. The yield curve movement on Tuesday was referred to some market players as a “bull steepener,” in which short-term rates decline more quickly than long-term ones.
According to economists, this frequently occurs when the Fed is predicted to lower interest rates. Following the release of the CPI data, U.S. breakeven inflation declined overall, with the largest decline being observed in one-year breakevens, which are presently down about 11 bps at 2.016%. This implies that during the following 12 months, investors should expect inflation to average around 2%. Now that consumer inflation is out of the way, investors will be watching U.S. retail sales data on Wednesday. A Reuters survey indicates that Wall Street economists anticipate a 0.3% decline in October following a 0.7% increase the month before. On Wednesday, the producer price index (PPI) for the US will also be released.
In contrast to a 0.5% increase in September, economists are predicting a 0.1% gain last month. The PPI decreased from 2.2% in September to 1.9% year over year. On its blog, Action Economics stated, “After today’s hefty reactions in Treasuries and equities, the risk to markets is for another upside surprise,” alluding to potential market movements following PPI and retail sales. Nov. 14, Tuesday, 3:10 PM New York Time / GMT +10 Cost Present Net Yield% Variation (bps) Bills for three months: 5.2575 5.4179 -0.008 Bills for six months: 5.21 5.4409 -0.054 Note for two years 100-84/256 -0.220 – 4.8212 100-34/256 4.5771 -0.237 three-year note Note for five years, 101-252/256 -0.238 – 4.4245 Note for seven years (102-116/256 4.4607 -0.228) 10-year note 4.4434 -0.189 100-116/256 Bond 94-112/256, 20 years -0.144 4.8141 Bond, 30 years, 102-24/256 -0.125 – 4.6203.