Bond Report: Treasury yields tumble after weaker-than-expected inflation data

Treasurys prices jumped, causing yields to tumble on Friday after inflation rose less than expected, threatening the outlook for a December rate increase.

What are Treasury yields doing?

The 2-year Treasury note yield TMUBMUSD02Y, -1.58% sensitive to shifting expectations for central bank policy, fell 3 basis points to 1.489%. The 10-year note yield TMUBMUSD10Y, -1.35%  slipped 4 basis points to 2.282%, while the 30-year bond yield TMUBMUSD30Y, -0.60% shed 3 basis points to 2.822%. Bond prices move inversely to yields.

What is driving the market?

The consumer-price index for September, a gauge of inflation, climbed 0.5%, with core prices rising 0.1%. Economists surveyed by MarketWatch were expecting a 0.6% jump, and an 0.2% gain for core prices.

With inflation not rising as fast as expected in September, investors said they were concerned that it weakened the case for raising rates in December. In addition, the data appeared to dent the Federal Reserve’s argument that the past few months of lackluster inflation readings was temporary. Bondholders tend to fear inflationary pressures as they can erode the value of bond’s fixed-interest payments.

See: U.S. inflation surges again after hurricane boosts gas prices, CPI shows

Traders in the fed-futures market are pricing in an 82% change of a quarter-percentage point rate increase at the Dec. 13 policy meeting, data from CME Group shows.

What are market participants saying?

“It’s really difficult to interpret this month’s data. People expected that energy prices would have an impact because of the hurricane. But if you look at the CPI excluding food and energy, it didn’t move up. And I think that’s what the Fed is concerned about, why inflation is not rising to its 2% target,” said John Bredemus, a strategist at Allianz Investment Management.

“We are increasingly concerned that the FOMC’s insistence on pushing toward a December rate hike risks a policy-error,” wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. “All else being equal, we would have expected the storm impact to have driven prices marginally higher if anything, so this weakness is particularly notable.”

What other economic data is on investors’ radar?

September’s retail sales jumped 1.6%, their biggest gain since 2015. But economists had forecast a 1.9% bump. Hurricanes Harvey and Irma forced Americans to buy new vehicles to replace their damaged cars and trucks.

Which central bankers are on the docket?

Friday will prove particularly busy for Fed-watchers. Boston Fed President Eric Rosengren, a nonvoting member this year of the rate-setting Federal Open Market Committee, said a low unemployment rate was pushing the central bank to raise rates at an economic conference in Boston. At the same conference, Fed Gov. Jerome Powell will speak at 1 p.m. Eastern.

Chicago Fed President Charles Evans, a voting member, will deliver a speech at 10:25 a.m. Eastern. Soon after, Dallas Fed President Robert Kaplan, voting member, will take part in a question-and-answer session at 11:30 a.m. Fed Chairwoman Janet Yellen will speak later on Sunday.

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