2-year Treasury Yield Drops To 3-month Low As U.S. CPI Shows Inflation Slowing Further

2-year Treasury Yield Drops To 3-month Low As U.S. CPI Shows Inflation Slowing Further

Treasury yields extended a new-year decline on Thursday, after an eagerly awaited U.S. December consumer-price index reading showed inflation continued to slow, in line with expectations.

What’s happening
  • The yield on the 2-year Treasury note
    TMUBMUSD02Y,
    4.132%

    fell 8.8 basis points to 4.138% at 3 p.m. Eastern. That’s the lowest finish based on 3 p.m. levels since Oct. 4, according to Dow Jones Market Data.
  • The yield on the 10-year Treasury
    TMUBMUSD10Y,
    3.446%

    declined 10.7 basis points to 3.446%, its lowest finish since Dec. 7.
  • The yield on the 30-year Treasury bond
    TMUBMUSD30Y,
    3.578%

    fell 10.6 basis points to 3.573% for the lowest finish since Dec. 16.
What’s driving markets

The U.S. consumer-price index fell 0.1% in December and posted the first decline since the onset of the pandemic in 2020, pointing to a further slowdown in inflation after it hit a 40-year peak last summer. Economists polled by The Wall Street Journal had forecast a 0.1% decline in the index.

The annual rate of inflation fell for the sixth month in a row to 6.5% from 7.1%. That’s the lowest level in more than a year and it’s down from a 40-year peak of 9.1% last summer.

The so-called core rate of inflation, which omits food and energy, rose 0.3%. That matched Wall Street’s forecast. The advance in the core rate over the past 12 months dropped to 5.7% from 6% to mark the lowest level in a year. The Fed views the core rate as a more accurate predictor of future inflation trends.

Meanwhile, Philadelphia Federal Reserve Bank President Patrick Harker said 25 basis point rate hikes would likely be appropriate going forward.

Traders boosted bets on a quarter-point rise at the Fed’s Feb. 1 meeting, as opposed to a supersize 50 basis point hike. Fed-funds futures now reflect a 94% probability of a 25 basis point increase.

See: Stock market lifted as traders bet on downshift in size of Fed rate hikes

What are analysts saying

“The market does not believe the Fed’s insistence that they will actually go above 5% and stay there for an extended period. This is best reflected in the U.S. 2-year yield,…which is as low as it’s been since early October ’22, many Fed rate increases ago,” said Louis Navellier, founder and president of Navellier & Associates, in a note.

“The 3-month annualized core CPI is down to 3.1% and at least another 1% lower if using new leases versus existing leases that have a six to twelve month lag. We continue to expect the Fed to only raise rates two more times as CPI continues to moderate,” said Bryce Doty, senior portfolio manager at Sit Investment Associates, in emailed comments.

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