Treasury yields advanced across the board on Wednesday, with the 10-year rate seeing its biggest daily rise in a year, after data showed consumer price inflation rising in October to the highest annual rate since November 1990.

The rise in yields was substantial, with the two-year rate posting its biggest one-day gain since March of 2020 and the 30-year rate notching its biggest daily gain in almost eight months.

What are yields doing?

The 10-year Treasury rate
TMUBMUSD10Y,
1.574%

rose 11.2 basis points to 1.558%, versus 1.431% at 3 p.m. ET on Tuesday. It was the yield’s highest level in a week and its biggest one-day advance since Nov. 9, 2020, based on 3 p.m. levels, according to Dow Jones Market Data.

The 2-year Treasury yield
TMUBMUSD02Y,
0.518%

rose 9.4 basis points to 0.503%, up from 0.409% a day ago. It’s the highest level since Nov. 1, and the largest daily gain since March 10, 2020.

The 30-year Treasury bond rate
TMUBMUSD30Y,
1.930%

climbed 9.7 basis points to 1.917%, rising from 1.820% on Tuesday. It’s the largest one-day yield gain since March 12 of this year.

What’s driving the market?

The cost of living rose sharply again in October as Americans paid more for staples such as gas and groceries, pushing the year-over-year headline rate of inflation to a nearly 31-year high. The pace of inflation over the past year rose to 6.2% in October from 5.4% in the prior month. That’s more than double the Federal Reserve’s 2% target.

Wednesday’s report had the bond market re-considering a greater chance of an earlier-than-expected interest-rate hike by the Fed. The odds of one 25 basis point hike in the Fed’s benchmark rate target by June are now nearly 48%, up from roughly 43% on Tuesday, and the chances of that move taking place in March have more than doubled, according to the CME FedWatch Tool. 

The CPI update comes a day after news of higher U.S. wholesale prices. Meanwhile, in data from overseas, China’s factory gate prices rose by a record 13.5% in October from a year earlier due to higher energy costs, representing the highest level since 1996. 

Also on Wednesday, a $25 billion auction of 30-year bonds turned “disastrous” according to Jefferies economists Thomas Simons and Aneta Markowska. The sale follows Tuesday’s $39 billion sale in 10-year Treasury notes, which was described as “soft” by BMO Capital Markets strategist Ben Jeffery.

Fixed-income markets have been whipped around in recent trade, with some traders saying they have less confidence on the best ways to position themselves between two competing narratives. One scenario is that higher inflation will likely lead to higher interest rates, while the other is that slowing economic growth leaves Fed policy makers patient about raising rates. Until Wednesday, moves in yields were dictated less by fundamental factors such as economic data and more by positioning.

At the conclusion of its policy gathering on Nov. 3, Federal Reserve policy makers pledged to be patient about normalizing interest rates, which has helped to mitigate some of the upward pressure on yields for government debt, although further signs of persistent inflation could renew concerns.

In other U.S. data releases Wednesday, the number of people who applied for unemployment benefits in early November slid to another pandemic low, as businesses frantically sought to beef up staff and avoid layoffs during the biggest labor shortage in decades.

New filings for jobless benefitsdropped by 4,000 to 267,000 in the seven days that ended Nov. 6, the government said Wednesday.  Economists polled by The Wall Street Journal had estimated new claims would total a seasonally adjusted 265,000. The data was published a day earlier than usual given Thursday is Veterans Day, a U.S. federal holiday.

Read: Is the Stock Market Open Today? Here are the Hours for Veterans Day 2020.

Wholesale inventories in the U.S. surged 1.4% in September as companies sought to stock up before the holiday season and keep up with torrid customer demand.

What analysts are saying

“The biggest concern for the Fed should be signs that longer-lasting cyclical inflation pressures are continuing to build rapidly,” said Andrew Hunter, senior U.S. economist at Capital Economics. “The bottom line is that, while it remains difficult to predict how far or for how long the various `transitory’ factors will boost inflation, there is increasing evidence that inflationary pressures are broadening out.” 

“Inflation is not only showing no signs of abating – it is accelerating,” said Steve Chiavarone, portfolio manager and equity strategist at Federated Hermes. “The acceleration this month was broad-based, undercutting the argument that it is simply being driven by one or two anomalous categories,” he wrote in a note to clients.

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