The reaction was muted in part because yields have already surged since the start of the year as traders brace for the Fed to begin hiking rates and wrapping up the bond purchases that have flooded markets with cash for nearly two years. Ahead of the inflation report, positioning in the broad Treasury market was the most net bearish since late 2017, according to the latest survey by JPMorgan Chase & Co.
U.S. Treasuries acquired, bouncing back from an initial wave of selling after purchaser value inflation sped up at the quickest yearly speed in forty years in December, with merchants as of now generally anticipating that the Federal Reserve will begin raising interest rates in March. The December inflation figures were in accordance with the bond market’s assumptions, and keeping in mind that benchmark Treasury yields at first rose decently across the curve after the delivery, purchasers before long arose. The year-on-year bounce in the shopper cost index matched a conjecture increment of 7%, while the core rate, which avoided food and energy costs, was somewhat more sultry, extending at a speed of 5.5%, versus a normal 5.4%.
“The market has aggressively repriced expectations for tighter Fed policy since the start of the year and it’s not a surprise to see some consolidation,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities.
The policy sensitive two-year note yield ended four basis points higher at 0.92% on Wednesday, while the benchmark 10-year note yield closed up one basis point at 1.74%, paring a brief jump above 1.75%. Treasury yields are either little changed or up one basis point across the curve on Thursday. Interest-rate futures continued to reflect an 88% probability of a quarter-point rate hike in March.
The market absorbed the sale of $36 billion 10-year notes on Wednesday, with primary dealers left with a 16.6% share, a touch above the recent average, according to BMO Capital Markets. The reopening arrived at the highest yield since January 2020 and after a sharp rise in the benchmark’s yield from 1.51% at the end of last year.
As the U.S. economy endures a period of elevated inflation pressure and wage gains are growing at a robust pace, the bond market started the year with a steep selloff on anticipation that the central bank’s loose monetary policy is poised to be rolled back. Fed Chair Jerome Powell said the central bank will use its tools “to prevent higher inflation from becoming entrenched” at his confirmation hearing before the Senate Banking Committee on Tuesday.
“If we see inflation persisting at high levels longer than expected [and] we have to raise interest rates more over time, we will,” Powell told lawmakers. Other Fed officials have recently lent weight to the idea of raising rates in March, while advocating shrinking the central bank’s $8.8 trillion balance sheet later this year.
The bond market has looked past high inflation reports in recent months, with many expecting a moderation over the coming year as long-term disinflationary trends of technology, greater automation and aging populations offset the current pandemic-related pressure. Treasury breakeven rates over the next 5 and 10 years peaked last November and were both down by seven basis points on Wednesday at 2.86% and 2.5% respectively.
“The Fed’s focus is not on CPI per se; its wages, and there are good reasons to expect higher wage inflation in the coming year,” said Steven Blitz, chief U.S. economist at TS Lombard. “The inflation psychology takes hold when people expect their wages will go up.”
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