Treasury yields took an unexpected dive on Tuesday following the release of the US Consumer Price Index (CPI) for October, which revealed a growth rate slower than initially anticipated. The data not only soothed investors’ apprehensions about potential future interest rate hikes by the Federal Reserve (Fed) but also hinted at the possibility of forthcoming rate cuts in the coming year.
The benchmark 10-year Treasury Note yield witnessed a substantial decline of 21 basis points, settling at 4.43%—its lowest level since September 22. Simultaneously, the 30-year bond yield experienced a drop of approximately 15 basis points, reaching 4.61%. This not only validated the Fed’s current policy stance of exercising patience with no immediate plans for rate hikes but also fueled speculation among some financial experts that the central bank might initiate rate cuts as early as June 2024.
Tony Farren, managing director in rates sales and trading at Mischler Financial Group, expressed confidence in the Fed’s position, stating, “I do think the Fed is done. The peak in inflation is over, that’s obvious. We’ve also seen the high in yields unless oil goes over $100 a barrel and stays there for some time, then all bets are off.”
Moreover, the year-on-year rate for the October CPI number decelerated to 4%, slightly below the median estimate of 4.1%. When factoring out food and energy costs, the Core CPI increased by 0.2%, falling short of the 0.3% expectation in the Bloomberg survey of economists. Following a peak of 5.02% on October 23, the 10-year yield has since declined by more than half a percentage point.
The broader index of Treasuries has experienced a 1.2% decline this year, contrasting with last year’s 12.5% drop and a 2.3% decrease in 2021. Short-term yields also witnessed a sharp decrease on Tuesday, as traders speculated on a swift Fed response to lower interest rates. JP Morgan’s strategists are anticipating an effective funds rate of 4.33% by December 2024, down from the current 5.33%.
Erin Browne, portfolio manager for multi-asset strategies at Pacific Investment Management Co., remains cautious about the Fed’s approach, believing they will take their time to confirm that inflation consistently drops before considering rate cuts.
Overall, the optimism growing within the bond market marks a stark contrast from just a few months ago when the likelihood of a third consecutive year of losses in Treasuries seemed imminent. The recent downturn in yields provides a potential reprieve for investors, steering away from further losses. Today’s October CPI data, coupled with the Fed’s increased circumspection about future rate hikes, has alleviated investors’ concerns of an ongoing surge in Treasury yields. This may signify the beginning of a positive shift in the fortunes of Treasuries and a welcome respite for investors who had braced themselves for additional losses.
Source: Bloomberg
