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Bond Report: 10- and 30-year Treasury yields reach one-month lows after producer-price data comes in below expectations

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U.S. bond yields slipped on Tuesday, sending 10- and 30-year rates to their lowest levels in at least a month, after October’s producer-prices report pointed to softening inflation and fresh geopolitical risks flared overseas.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.344%

slipped 4.7 basis points to 4.359% from 4.406% on Monday. The yield is down four of the past five trading days.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.763%

retreated 6.7 basis points to 3.798% from 3.865% as Monday afternoon.That’s the lowest level for the yield since Oct. 5, based on 3 p.m. figures from Dow Jones Market Data.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.949%

declined 7.7 basis points to 3.980% from 4.057% late Monday. That’s the 30-year yield’s lowest level since Oct. 14.

What drove markets

Data released on Tuesday showed that wholesale prices were rising slowly again in October. The producer-price index rose by just 0.2% last month, a fourth straight soft reading that indicates inflation is waning after hitting a four-decade high this year. Economists polled by The Wall Street Journal had forecast a 0.4% gain.

Meanwhile, the New York Federal Reserve’s Empire State business conditions index, a gauge of manufacturing activity in the state, rose 13.6 points to 4.5 in November, the regional Fed bank said Tuesday. That’s the first positive reading since July.

Treasury yields edged lower as the market continued to assess the prospects for a slower pace of Federal Reserve rate increases following last week’s cooler-than-expected consumer inflation data. Markets are pricing in an 81% probability that the Fed will raise interest rates by another 50 basis points to a range of 4.25% to 4.50% on Dec. 14, according to the CME FedWatch tool. The central bank is still mostly expected to take its fed-funds rate target to at least between 4.5% and 4.75% by March.

Read: Financial markets ran with ‘peak inflation’ narrative again. Here’s why it’s complicated.

Geopolitical risks rattled stock investors briefly, but didn’t affect the overall direction on Treasury yields. The Associated Press reported that a Russian missile barrage on a Ukrainian power grid hit Poland on Tuesday, killing two people and cutting electricity to much of Moldova.

Meanwhile, there was better news on inflation from Europe, where the month-on-month German wholesale prices index fell 0.6% in October compared to a 1.6% advance in September. The year-on-year figure dropped to 17.4% from 19.9%. The yield on the German 10-year bund
TMBMKDE-10Y,
2.113%

fell to 2.1%.

What are analysts saying

Tuesday’s PPI data is “another downside surprise that reinforces the peak inflation narrative and offers evidence that the Fed’s efforts to combat inflation are increasingly effective,” said Ian Lyngen of BMO Capital Markets.

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