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Bond Report: 2- and 10-year Treasury yields post biggest daily drops in over a decade after October inflation data

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Treasury yields plunged on Thursday after cooler-than-anticipated October inflation data reinforced expectations that Federal Reserve policy makers might begin backing off aggressive interest rate hikes in December.

The drop in yields reflected huge demand for government bonds, leading to the biggest rally in 2- and 10-year Treasurys in at least 13 years, and came as traders prepared to head into Friday’s Veterans Day holiday. The bond market is closed on Friday.

Read: Bonds head for biggest one-day rally in more than a decade after October’s downside inflation surprise

What happened

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.323%

slipped 30.4 basis points to 4.324% from 4.628% on Wednesday. It was the largest one-day decline in the yield since Sept. 29, 2008, based on 3 p.m. figures from Dow Jones Market Data.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.831%

dropped 31.3 basis points to 3.828% after factoring in new issue levels. It was the yield’s biggest one-day decline since March 18, 2009. 

The yield on the 30-year Treasury
TMUBMUSD30Y,
4.063%

fell 23.7 basis points to 4.080% from 4.317% Wednesday afternoon. It was the yield’s largest one-day decline since March 9, 2020. 

What drove markets

U.S. inflation showed signs of cooling in Thursday’s consumer-price index report for October, with the cost of living rising a relatively modest 0.4% in October. Economists polled by The Wall Street Journal had forecast a 0.6% increase in the consumer price index.

The yearly rate of inflation slipped to 7.7% from 8.2%, marking the lowest level since January, and the so-called core rate of inflation that omits food and energy rose just 0.3% for the month. Wall Street had forecast a 0.5% gain.

The report could keep the Federal Reserve on track for a half-percentage-point interest-rate increase in December, even as policy makers consider higher rates in 2023 than they had previously expected, The Wall Street Journal reported.

The takeaway from remarks made by a number of Fed officials on Thursday is that they are not going to declare victory on their inflation battle just yet. Loretta Mester, the president of the Cleveland Fed, said the central bank needs to keep raising interest rates until price pressures dissipate more rapidly.

After Thursday’s CPI report, fed-funds futures traders priced in an 85% chance that the Fed will raise its benchmark interest rate by 50 basis points to a range of 4.25% to 4.50% on Dec. 14. Meanwhile, the probability of a 75 basis point hike sank to almost 15% versus 43% on Wednesday.

Traders also pulled back a bit on how high they see the Fed taking rates in the first half of 2023, with expectations now mostly in a range between 4.75% and 5%, according to the CME FedWatch Tool.

Treasury’s $21 billion auction of 30-year bonds on Thursday came in “strong” with the “underlying metrics all coming in ahead of the recent auctions,” said Michael Reinking, senior market strategist for the New York Stock Exchange.

Stock Market Today: Live coverage of Thursday’s market action

What analysts are saying

“Markets are starved for positive news, so they grasped at every ounce of inflation relief in the October CPI.  Volume surged to a modern record for a CPI release,” said Jim Vogel, executive vice president at FHN Financial in Memphis. “Never mind that compounding big increases with moderate increases is a losing proposition for the Fed.  It’s just full speed ahead for financial markets into the long weekend.”

Mark Hulbert: Curb your enthusiasm — Thursday’s explosive rally in stocks likely means the bear market is alive and well

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