The policy-sensitive 2-year Treasury yield finished lower for the first time in four sessions on Wednesday, as traders evaluated the U.S. August consumer price index and leaned toward expecting no further interest rate action by the Federal Reserve this year.
What happened
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
declined 1.9 basis points to 4.984% from 5.003% on Tuesday. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
slipped 1.5 basis points to 4.248% from 4.263% Tuesday afternoon. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
dipped 1 basis point to 4.335% versus 4.345% late Tuesday.
What drove markets
Data released on Wednesday showed that U.S. consumer prices jumped 0.6% for the month of August largely because of rising oil prices; that was the biggest increase in 14 months. The annual rate of inflation moved up to 3.7% last month from the prior two months.
Economists had expected the headline year-over-year CPI to rise by 3.6% in August. Meanwhile, the month-on-month reading of 0.6% matched economists’ estimates.
The core measure, which strips out the volatile items such as energy and food, rose a smaller 0.3% in August and decelerated on an annual basis to 4.3% from 4.7% previously.
Markets priced in a 97% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% next Wednesday, according to the CME FedWatch Tool. Fed funds futures traders also saw a more-than-50% chance of no action in November or December.
Read: ‘Complicated’ inflation report produces wavering U.S. stocks, keeps higher-for-longer theme in rates intact and When will inflation cool to the Fed’s 2% target? By late next year, says JP Morgan strategist.
Treasury’s $20 billion of 30-year bonds Wednesday afternoon produced “soft” results, according to strategist Ben Jeffery of BMO Capital Markets.
In Europe, the 10-year German bund yield
BX:TMBMKDE-10Y
rose less than 1 basis point to 2.654% after Reuters reported that the European Central Bank expects inflation in the eurozone to remain above 3% next year, boosting the case for a 10th consecutive interest rate increase on Thursday.
U.K. 10-year yields
BX:TMBMKGB-10Y
fell 6.9 basis points to 4.345% after data showed the British economy contracting by 0.5% between June and July, a bigger fall than the 0.2% decline predicted by analysts.
What analysts are saying
“Today’s inflation report likely does not move the needle much for the FOMC ahead of its session next week — no rate hike remains the base case, especially given the considerable tightening that has yet to completely work its way through the economy,” said Jason Pride, chief of investment strategy and research at Glenmede, which manages roughly $42 billion in assets. “However, the pickup in inflation may increase the chance of additional tightening before year-end, as getting the inflation genie back in the bottle does not appear as straightforward as some would have hoped.”
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