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Treasury Yields Plunge as Traders Run With ‘Good News’ on CPI

By: Liz Capo McCormick

(Bloomberg) — Yields in the world’s biggest bond market spiraled downward as traders slashed their outlook for just how high the Federal Reserve will need to hoist its policy rate after consumer-price pressures slowed more than estimated last month.

Swaps traders downgraded the odds of another three-quarter-point rate increase in December almost to nil, while continuing to price in a half-point hike. On the prospect of a slower
tightening trajectory the five-year yield tumbled as much as 31-basis points, putting it on track for its biggest one-day drop since 2009. The benchmark 10-year yield fell as much as 27 basis points to 3.82%. US stocks soared and the Bloomberg dollar index plunged.

The so-called terminal rate, or the expected peak for the Fed’s policy rate, was cut to under 4.9%, sometime around May. Before the latest CPI readings the peak rate in swaps referencing the central bank’s policy meetings was around 5.09%.

“Markets are reacting aggressively to the CPI release,” said Gregory Faranello, Head of US Rates Trading & Strategy at AmeriVet Securities. “After a year like we’ve had, people are very anxious for some good news.”

Rising yields fueled by persistently high inflation and Fed rate increases aimed at slaying it have saddled Treasuries with losses that exceed 14% so far in 2022. The easing of price pressures “lends itself to our belief that the Fed would like to downsize rate hike levels to 50-basis points” next month, Faranello said.

In public remarks after the data Thursday, Philadelphia Fed President Patrick Harker and Dallas Fed President Lorie Logan reiterated an idea that Fed Chair Jerome Powell has been making since July — that at some stage it will become appropriate to slow the pace of rate increases. Both said that point is approaching.

The rate on the December overnight index swap contract fell to around 4.35%, just 52 basis points above the current effective fed funds rate.

The core consumer price index, which excludes food and energy, increased 0.3% from the prior month, Labor Department data showed Thursday. Compared with a year earlier, the core measure decelerated from a four-decade high in September to 6.3%. The overall CPI advanced 0.4% last month, bolstered by a pickup in gasoline prices, and was up 7.7% from a year ago.

The slide in the 10-year yield was a win for any investors who bought the security at auction Wednesday, when it was issued at a rate of 4.14%. The expected yield for Thursday’s sale of
30-year bonds at 1 p.m. New York time slid to about 4.05% from this week’s peak of around 4.30% on Tuesday.

–With assistance from Libby Cherry and James Hirai.