(Nov 10): Treasuries sank and traders solidified their bets that Federal Reserve officials will raise interest rates when they next meet in December after evidence of persistently hot US inflation.
The declines sent yields higher by more than 10 basis points (bps) for Treasuries maturing in two to five years on Tuesday after the economic data. Traders added to bets on at least two rate hikes by the middle of 2027 — and started to price in a small chance of a jumbo-sized half-point move in December.
Earlier, they’d fully priced in expectations for a quarter-point increase in December after Fed governor Christopher Waller said in London that he supported a rate increase and that he’d favour a half-point hike if inflation continued to accelerate.
“Clearly, the 50 basis point hike is on the table for discussion,” especially after Waller’s remarks, Tiffany Wilding, an economist at Pacific Investment Management Co, said on Bloomberg TV.
The consumer price index, excluding food and energy, rose 0.3% from a month earlier, according to Bureau of Labor Statistics (BLS) data. Overall prices climbed 0.4%. The BLS didn’t publish year-over-year changes because data collection was interrupted last October during the government shutdown. It follows a reading of the labour market last Friday that highlighted solid hiring trends and an unexpected jump in wage growth.
Traders saw both reports as supportive for higher US interest rates after policymakers opted for a quarter-point increase in September and then left rates steady in October. The 10-year note was 5bps higher at 4.94% ahead of the Treasury’s auction of a US$42 billion (RM170.4 billion) new issue at 1pm New York time.
“The Fed skipped October and now will probably need to do some make up,” Alex Pelle, senior US economist at Mizuho, said. The “debate will likely be between 25 versus 50 basis points at the December meeting, not zero versus 25.”
US government bonds have recovered some of the year’s losses tied to concerns that the war in Iran and elevated energy costs would keep inflation sticky. After registering multi-decade peaks in early October, the market has benefitted from its reputation as a haven. A Democratic sweep in the midterm elections intensified angst around the sustainability of spending on artificial intelligence (AI) infrastructure, leading to a selloff in the stock market and a dash for safety.
“The AI tech trade has to settle down, and once that happens, you can make a very strong case that this plunge in yields by 50 basis points over the past month was really just safe haven demand,” said Kevin Flanagan, head of investment strategy at WisdomTree. “If you look at what has occurred in terms of the economic data, it would suggest that we could see yields rise — and perhaps back to 5% for the 10-year.”
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