Treasurys rallied across the board Tuesday, with the 10- and 30-year yields slipping to the lowest level in months, as traders brushed aside data showing U.S. wholesale inflation surged in October.

Traders remained focus on recent dovish pivots of major central banks like the Bank of England and Federal Reserve, and said hedge funds continued to unwind wrong-way positions on yields with no let-up in sight.

What are yields doing?

The 10-year Treasury yield
TMUBMUSD10Y,
1.436%

declined 6.5 basis points to 1.431%, down from 1.496% on Monday at 3 p.m. Eastern Time. That’s the lowest since Sept. 23, based on 3 p.m. levels, according to Dow Jones Market Data.

The 2-year Treasury note yield
TMUBMUSD02Y,
0.418%

fell 3.8 basis points to 0.409%, compared with 0.447% a day ago.

The 30-year Treasury bond rate
TMUBMUSD30Y,
1.818%

dropped 6.7 basis points to 1.820%, down from 1.887% on Monday. That’s the lowest since July 19.

What’s driving the market?

Investors looked past government data released Tuesday, showing U.S. wholesale prices surged in October and gave Americans no relief from high inflation. The producer price index rose 0.6% last month, the government said, matching Wall Street expectations. A sizable chunk of the increase was due to the wholesale cost of gasoline and vegetables, which both rose sharply.

The PPI reading comes ahead of the October consumer price index on Wednesday. Analysts say October’s headline, year-over-year CPI rate likely accelerated closer to 6%, following five months of readings ranging from 5% to 5.4%. Meanwhile, optimism among small-business owners waned last month. The NFIB Small Business Optimism Index decreased to 98.2 in October from 99.1 in September, below the 99.5 consensus forecast from economists polled by The Wall Street Journal.

Ordinarily, signs of ongoing inflation would be reflected in higher yields, as long as the economic outlook seems bright, with traders pricing in greater inflation premium. But with Federal Reserve Chairman Jerome Powell pledging on Nov. 3 to be patient about raising interest rates, the opposite is happening, with yields tilting lower.

Meanwhile, inflation concerns have dragged the yield on 30-year Treasury inflation-protected securities, or TIPS, to around an all-time closing low, while the 5-year and 10-year TIPS rates have also sunk since Nov. 3, according to Tradeweb data as of Tuesday.

At its policy meeting last week, the Fed said that elevated inflation appears to be reflecting factors that are expected to be transitory. Powell also said it’s possible that the job market could improve sufficiently to warrant interest-rate increases by the second half of 2022.

Investors continue to focus on the possible successors to Powell, whose term ends next February. On Monday, Bloomberg News reported that Fed Gov. Lael Brainard was interviewed for the job as the central bank’s next chair during a visit at the White House last week. The possibility of Brainard, known for a dovish view on rates, succeeding Powell is one of the factors that held yields down on Tuesday, traders said.

Meanwhile, an auction of $39 billion in 10-year Treasury notes “was soft,” according to BMO Capital Markets strategist Ben Jeffery.

What analysts are saying

“Real money buyers are still there and demand for fixed-income paper is still very, very strong,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities in New York. “The only momentum that has come to push rates higher is from the levered community,  even though many in it are trying to get out now, and that’s a theme that has been challenged time and again in 2021.”

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