U.S. Treasury yields surge after October CPI exceeds expectations
October consumer price data came in higher than forecast, prompting a sharp rise in Treasury yields and boosting market expectations of a larger-than-usual Fed rate hike in December.
U.S. Treasury yields rose sharply on Tuesday following the release of October consumer price data that showed inflation running above economists’ forecasts. The Consumer Price Index increased 0.4% in October after a 0.6% gain in September, while core CPI, which excludes food and energy, rose 0.3%, matching the previous month’s increase.
Traders in Fed funds futures now anticipate a rate hike at the Federal Reserve’s December 8-9 meeting, with some betting on a 50-basis-point increase, larger than the typical 25-basis-point move. Fed Governor Christopher Waller said the central bank should consider a half-point hike in December if inflation remains elevated, adding that a stronger policy move may be needed if core prices stay at 0.3% or higher.
Analysts attributed the market reaction to the combination of the hotter-than-expected data and Waller’s comments. “There was a one-two punch, with Waller saying he was inclined to support a hike next month and even throwing out the idea of a 50-basis-point hike,” said Will Compernolle, macro strategist at FHN Financial.
The 2-year note yield climbed 18.7 basis points to 4.73%, its highest level since October 28, while the benchmark 10-year yield rose 12.6 basis points to 4.99%, the highest since October 29. The spread between the two-year and 10-year yields narrowed to 25 basis points, the flattest since September 24.
Principal Asset Management’s chief global strategist Seema Shah described the inflation report as a “warning shot,” noting that a December hike now appears likely and that the surprise extended beyond energy to core goods and services.
The Treasury sold $42 billion of 10-year notes on Tuesday, the second auction of $125 billion in coupon-bearing debt this week, with the auction yielding a high rate of 5.02% and awarding 95.17% of bids at that rate. Earlier, a $58 billion sale of 3-year notes saw mixed demand, and a $25 billion auction of 30-year bonds is scheduled for Thursday. The bond market will be closed on Wednesday for the Veterans Day holiday.
Producer price inflation data for October is expected on Friday.