Bond yields fell on Tuesday ahead of U.S. producer prices data.
What’s happening
- The yield on the 2-year Treasury TMUBMUSD02Y, 4.365% slipped 3 basis points to 4.361%. Yields move in the opposite direction to prices.
- The yield on the 10-year Treasury TMUBMUSD10Y, 3.816% retreated 4 basis points to 3.818%.
- The yield on the 30-year Treasury TMUBMUSD30Y, 4.011% fell 2.3 basis points to 4.018%.
What’s driving markets
Treasury yields edged lower as the market continued to assess the prospects for a slower pace of Federal Reserve rate hikes following last week’s cooler-than-expected consumer inflation data.
Markets are pricing in an 81% probability that the Fed will raise interest rates by another 50 basis points to a range of 4.25% to 4.50% after its meeting on December 14th, according to the CME FedWatch tool. The central bank is expected to take its Fed funds rate target to 5.1% by May 2023, according to 30-day Fed Funds futures.
Fed speakers on Tuesday include Philadelphia Fed President Patrick Harker talking about the economic outlook at 9 a.m. and Fed Vice Chair Michael Barr testifying on regulation at the Senate Banking Committee, starting at 10 a.m. All times Eastern.
U.S. economic updates set for release on Tuesday include the producer price index for October and the Empire State manufacturing index for November, both due at 8:30 a.m. Eastern.
There was better news on inflation from Europe, where the month-on-month German wholesale prices index fell 0.6% in October compared to a 1.6% advance in September. The year-on-year figure dropped to 17.4% from 19.9%. The yield on the German 10-year bund TMBMKDE-10Y, 2.103% fell 1.8 basis points to 2.129%.
What are analysts saying
Fixed-income observers were continuing to parse last week’s softer U.S. consumer prices data and the Fed’s pushback on the market’s ebullient reaction to it.
“[Fed Governor] Waller is right that last week’s report was only a single print and we shouldn’t be celebrating too early. We are also wary that even if this is the start of a downtrend, year-on-year inflation will still remain too high into next year, which will be a challenge for the Fed,” wrote Jan Nevruzi, U.S. rates strategist at NatWest Markets, in a note.
“Nevertheless, the details within the CPI number were encouraging and his viewpoint could change just as quickly if unemployment starts moving higher and inflation continues to pullback. The December data will shed more light (out of which CPI comes during the Fed’s blackout period again),” Nevruzi added.