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Bond Report: 2-year Treasury yield drops by most in a month after November’s cooler-than-expected CPI data

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Treasury yields fell, led by 2- and 3-year rates, after November’s consumer-price index report produced a modest rise in inflation and raised hopes that the worst spell of price gains in four decades is receding.

What happened

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.214%

declined 17.2 basis points to 4.229% from 4.401% on Monday. That’s the largest one-day drop in the rate since Nov. 10, based on 3 p.m. figures from Dow Jones Market Data. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.504%

retreated 11.1 basis points to 3.501% from Monday’s level after factoring in reopening levels.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.535%

fell 4.8 basis points to 3.527% from 3.575% late Monday.

What drove markets

The U.S. consumer-price index report for November, released on Tuesday, showed that the annual headline rate of inflation fell to 7.1 % from 7.7% in the prior month, marking the lowest level since the end of 2021. Economists had expected year-over-year CPI growth, which peaked at a four-decade high of 9.1% in June, to slip to 7.3% last month.

On a monthly basis, the cost of living rose a scant 0.1% in November, the latest in a string of mild readings that suggest the worst spell of U.S. inflation in 40 years is fading. Economists polled by The Wall Street Journal had forecast a 0.3% increase in the consumer-price index.

November’s CPI data solidified the likelihood that the policy-setting Federal Open Market Committee will raise rates by 50 basis points to a range of 4.25% to 4.50% on Wednesday, according to the CME FedWatch tool. In addition, the chances of a smaller 25-basis-point hike in February jumped to 52.5% from 35.1% a day ago, according to 30-day fed funds futures.

Read: Why November U.S. CPI data is seen as a ‘game-changer’ for financial markets

Benchmark bund yields
TMBMKDE-10Y,
1.922%

fell 1.7 basis points to 1.923% after a report showed that German inflation slipped in November from a more-than-70-year high. In the U.K., the 10-year gilt yield BX:TMBMKGB-10Y rose 9.6 basis points to 3.296% following data that showed the unemployment rose in November but pay growth was accelerating.

The European Central Bank and the Bank of England are each forecast to lift interest rates by 50 basis points on Thursday.

What analysts are saying

“Today’s November CPI release should allow the FOMC room to breathe as we head into 2023,” said Tim Magnusson, chief investment officer of Minnesota-based Garda Capital Partners, which oversaw more than $8 billion as of November.

“Energy inflation is abating, while services inflation seems to be holding steady,” he wrote in an email to MarketWatch. “After four consecutive 75bp hikes, and another 50bp hike likely to come tomorrow, the Fed is no longer behind the curve on its inflation fight, in our view.”

: Food inflation is cooling, but double-digit percentage increases persist for these items

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