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Treasury yields slip despite surge of U.S. wholesale inflation in October

By Vivien Lou Chen and Mark DeCambre

Treasury yields retreated Tuesday morning, even after data showed U.S. wholesale inflation surging for October, as fixed-income investors turned their attention to a fresh round of speakers from the Federal Reserve and an auction of 10-year notes later in the session.

What are yields doing

  • The 10-year Treasury yield TMUBMUSD10Y, 1.445% was at 1.415%, down from 1.496% on Monday at 3 p.m. Eastern Time
  • The 2-year Treasury note yield TMUBMUSD02Y, 0.422% was at 0.415%, compared with 0.447% a day ago.
  • The 30-year Treasury bond rate TMUBMUSD30Y, 1.826% yields 1.828%, down from 1.887% on Monday.

What’s driving the market?

Government data released Tuesday showed that U.S. wholesale prices surged again in October, offering Americans no relief from high inflation. The producer price index rose 0.6% last month, the government said Wednesday, matching Wall Street expectations. A sizable chunk of the increase was due to the wholesale cost of gasoline and vegetables, which both rose sharply.

The PPI reading comes ahead of the October consumer price index on Wednesday. Analysts say October’s headline, year-over-year CPI rate likely accelerated closer to 6%, following five months of readings ranging from 5% to 5.4%. Meanwhile, optimism among small-business owners waned last month. The NFIB Small Business Optimism Index decreased to 98.2 in October from 99.1 in September, below the 99.5 consensus forecast from economists polled by The Wall Street Journal.

Ordinarily, signs of ongoing inflation would be reflected in higher yields, as long as the economic outlook seems bright, with traders pricing in greater inflation premium. But with Federal Reserve Chairman Jerome Powell pledging to be patient about raising rates even with persistent price pressures, the opposite is happening, with yields tilting lower and fixed-income markets trading in a narrow range.

Inflation concerns have dragged the yield on 30-year Treasury inflation-protected securities, or TIPS, to its lowest level since the inception of the instrument in 1998. Bloomberg News reported that 30-year TIPS on Monday fell by about 7 basis points to minus 0.508%.

At its policy meeting last week, the Fed said that elevated inflation appears to be reflecting factors that are expected to be transitory. Powell said it’s possible that the job market could improve sufficiently to warrant interest-rate increases by the second half of 2022.

Investors, meanwhile, continue to focus on the possible successors to Powell, whose term ends next February. On Monday, Bloomberg News reported that Fed Gov. Lael Brainard was interviewed for the job as the central bank’s next chair during a visit at the White House last week.

Fed speakers on Tuesday will include San Francisco Fed President Mary Daly, who is set to appear at 11:35 a.m. Eastern time in a moderated discussion at the NABE Tech Economics Conference.

Looking ahead, fixed-income investors will also be watching for an auction of $39 billion in 10-year Treasury notes at 1 p.m.

What analysts are saying

  • “We are seeing much more generalized inflation,” Tom Graff, Brown Advisory’s head of fixed income, wrote in a note. “We think this trend will continue to be evident in Wednesday’s CPI report. Consumer spending is still very high, and supply chain pressures remain problematic. That combination probably means inflation is becoming more engrained, and more likely to persist into 2022 at elevated levels.”
  • “US inflation expectations have been on fire. And with that, real yields are screaming negative,” Gregory Faranello, head of U.S. rates at AmeriVet Securities, wrote in a Tuesday research note. “We still believe real yields look too low, but with the Fed pushing back on the timeline for rate hikes and inflationary pressures still very elevated, we get what we have: 10-year real yields close to cycle lows. Investors are still craving protection against inflationary forces.”


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