Bond Report: 2-year Treasury yield jumps by most in more than a week as Fed official pushes back on inflation optimism


Two- and 10-year Treasury yields advanced by the most in over a week on Monday, following weekend comments by Federal Reserve Governor Christopher Waller who said financial markets seem to have “gotten way” ahead of themselves over October’s consumer price index.

What’s happening

The yield on the 2-year Treasury

rose 8.2 basis points to 4.406% from 4.324% on Thursday. It’s the yield’s largest one-day gain since Nov. 3, based on 3 p.m. figures, according to Dow Jones Market Data.

The yield on the 10-year Treasury

advanced 3.7 basis points to 3.865% from 3.828% as of Thursday afternoon. That’s the 10-year yield’s largest gain since Nov. 7.

The yield on the 30-year Treasury

rose 1.3 basis points to 4.057% after factoring in new-issue levels.

What’s driving markets

The U.S. Treasury market returned to action Monday in the wake of a huge rally last Thursday following cooler-than-expected inflation data and Friday’s closure for the Veterans Day holiday.

The 10-year Treasury yield retraced a portion of its 31.3-basis-point dive from Thursday’s session — the biggest one-day drop since March 18, 2009 — after the Fed’s Waller said on Sunday that financial markets seem to have overreacted to October’s softer-than-expected consumer-price index data.

“The market seems to have gotten way out in front over this one CPI report. Everybody should just take a deep breath, calm down. We’ve got a ways to go, ” Waller said.

Meanwhile, Waller’s colleague, Lael Brainard, told Bloomberg that “it will probably be appropriate soon to choose a slower pace of increases” in interest rates.

Markets are pricing in an 85% probability that the Fed will raise interest rates by another 50 basis points to a range of 4.25% to 4.5% on Dec. 14, according to the CME FedWatch tool. The central bank is mostly expected to take its fed-funds rate target to at least 4.5% to 4.75% by the first half of 2023.

What are analysts saying

“October’s CPI report was the first tangible evidence supporting the peak inflation (and therefore yields) narrative and, as such, it shifts the focus to December’s FOMC meeting as the potential for a downshift to 50 bp,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery. “If nothing else, the deceleration of core-CPI has taken another 75 bp hike off the table. The most relevant caveat that we’ll offer is that prior to the [Federal Open Market] Committee’s decision next month, policy makers will have the benefit of the November CPI series as well; although even a modestly faster core inflation read won’t necessitate another supersized tightening given how far into restrictive territory policy has already reached.”

The Fed: Fed’s Brainard says appropriate ‘soon’ to step down to slower pace of rate hikes

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