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Treasury yields end steady as traders position ahead of December’s CPI inflation report

Treasury yields finished little changed on Wednesday following a decent 10-year government auction and ahead of the December consumer-price index report on Thursday.

What happened

The yield on the 2-year Treasury BX:TMUBMUSD02Y was marginally lower at 4.369%, versus 4.37% on Tuesday. The yield on the 10-year Treasury BX:TMUBMUSD10Y rose 1.3 basis points to 4.029%, from 4.016% on Tuesday. The yield on the 30-year Treasury BX:TMUBMUSD30Y advanced 1.8 basis points to 4.2%, from 4.182% on Tuesday.

What drove markets

Bond markets were calm on Wednesday as investors positioned ahead of the December inflation report, due out on Thursday morning. The data represents “the final major round of fundamental inputs” to assess through Jan. 31, according to BMO Capital Markets strategists.

Economists expect annual headline CPI inflation, which has been falling since its peak of 9.1% in mid-2022, to inch up to 3.2% for December versus 3.1% in November. However, the core reading, which strips out more volatile items like food and energy, is expected to decline to 3.8%, from 4% previously.

On Wednesday, fed-funds futures traders priced in a 95.3% probability that the Fed will leave interest rates unchanged at 5.25% to 5.5% at its next meeting Jan. 31, according to the CME FedWatch Tool. The chance of at least a 25-basis-point rate cut by March was seen at 67.6%, and the central bank is mostly expected to take its main policy-rate target down to a range of 4% to 4.25%, or even lower, by December. Speaking on Wednesday in White Plains, N.Y., New York Fed President John Williams said interest rates will likely need to stay high “for some time” until the central bank is confident about inflation returning to 2%.

Meanwhile, Treasury’s $37 billion auction of 10-year notes Wednesday afternoon was “very spot-on” and drew “pretty decent demand,” according to Tom di Galoma, co-head of global rates trading for BTIG in New York. Primary dealers took about 15.1%, compared with an average of 14.7% over the last 12 months for such auctions, while direct bidders took a slightly higher-than-normal 18.7%, he said. The sale came a day after a $52 billion sale of 3-year notes that went “very well,” di Galoma said via phone.

What strategists are saying

“Market-based inflation expectations have come way down, signaling the Fed is going to be successful in fighting inflation,” said Gregory Faranello, Head of U.S. Rates Trading and Strategy at AmeriVet Securities in New York. “But it’s been a little bumpy because markets are trying to understand what it all means,” he said via phone. “The question is, if inflation does come down, will that give the Fed leeway to lower rates despite the fact that the labor market has held up more robustly than we expected?”

-By: Vivien Lou Chen