Bond yields fell early Thursday as investors awaited U.S. inflation data they hope will signal the Federal Reserve may consider cutting interest rates in coming months.
What’s happening
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
dipped by 2.1 basis points to 4.342%. Yields move in the opposite direction to prices.
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
fell 4.4 basis points to 3.990%.
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
retreated 3.6 basis points to 4.170%.
What’s driving markets
Traders are waiting for 8:30 a.m. Eastern when the U.S. consumer price index data for December will be published.
Economists expect headline annual inflation to have risen 3.2% last month from 3.1% in November. Core inflation, which strips out volatile items such as energy and food, is expected to have fallen to 3.8% from 4%.
On a month-on-month basis, headline inflation is expected to have risen 0.2% in December, compared to 0.1% in November, while the core is forecast to be up 0.3%, the same at the previous month.
The dip in annual core inflation in particular will be welcomed by the Federal Reserve as it strives to get the headline rate back to its 2% target.
U.S. inflation reached a multi-decade peak of 9.1% in the summer of 2022, amid a spike in energy prices and COVID-related supply disruptions, prompting the central bank to embark on a campaign of swift interest rate rises.
Bond markets have rallied in recent months, pushing yields sharply lower, as investors bet that the subsequent easing of inflation will allow the Fed to soon start trimming borrowing costs.
However, some analysts have warned that the market may be too optimistic about the likely pace of Fed rate cuts given that reducing inflation further may prove harder.
“Importantly, absent improvements on the supply side, the outlook for continued disinflation to 2% is likely to get trickier from here — the so-called ‘last mile’ challenge,” said Mohamed El-Erian, adviser to Allianz and Gramercy, in a post on X.
Early on Thursday, markets were pricing in a 97.4% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on January 31st, according to the CME FedWatch tool.
The chances of at least a 25 basis point rate cut by the subsequent meeting in March is priced at 68.9%. The central bank is expected to take its Fed funds rate target back down to around 4% by December 2024, according to 30-day Fed Funds futures.
“For now at least, markets remain confident that the Fed is about to pivot soon…But so far, officials have generally been talking about later moves,” said Jim Reid, strategist at Deutsche Bank.
“However, the Fed will have three more CPI prints, starting today, before the March meeting. So things can still change,” Reid added.
Cleveland Fed President Loretta Mester will appear on Bloomberg Television at 11:30 a.m., and Richmond Fed President Tom Barkin will speak on the economic outlook at 12:40 p.m.
Other economic data on Thursday includes the weekly initial jobless claims, also released at 8:30 a.m.
The U.S. Treasury will auction $21 billion of 30-year bonds at 1 p.m.
The monthly budget statement will be released at 2.p.m. The Congressional Budget Office estimates a deficit of $128 billion in December.
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