Treasury yields rise to highest levels of year after CPI inflation report

Treasury yields soared to levels not seen in at least two months on Tuesday after January’s U.S. consumer price report showed inflation speeding up.

What’s happening

  • The yield on the 2-year Treasury
    soared 12.3 basis points to 4.59% from 4.467% on Monday. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    jumped 9 basis points to 4.26% from 4.170% on Monday after touching an intraday high of 4.3%.

  • The yield on the 30-year Treasury
    rose 6.7 basis points to 4.437%, from 4.370% on Monday.

What’s driving markets

Data released on Tuesday showed that inflation, as measured by the U.S. consumer-price index, came in hotter than expected for January.

Consumer prices rose 0.3% last month and the annual headline rate of inflation failed to drop below the 3% threshold as investors were hoping for.

Even the core rate that strips out volatile items like food and energy rose by a stronger-than-expected 0.4% last month, while the annual rate of core inflation was unchanged at 3.9%.

Tuesday’s report comes after a string of evidence that the economy remains strong, and is giving investors and traders reason to push back their expectations on the timing of the first rate cut from the Federal Reserve.

Currently, markets are pricing in a 78% probability that the Fed will deliver at least a quarter-point rate cut in June, according to the CME FedWatch Tool. They also see an 87.2% chance of at least three rate cuts by December.

Elsewhere, there was a reminder from the U.K. of further inflationary pressures. Britain’s Office for National Statistics said that average weekly wages, including bonuses, rose by more than expected toward the end of last year. The U.K. 2-year government bond yield climbed 10.1 basis points to 4.650%.

What analysts are saying

“The ‘January effect’ where companies tend to raise prices at the turn of the year was likely one driver of the stronger print, with companies continuing to push price [gains] after another year of strong inflation. Companies that expected prices to rise at a more muted pace in 2023 may have needed to ‘catch up’ and were able to do so given the continued strong pricing environment,” said Josh Jamner, investment strategy analyst at ClearBridge Investments.

Read More: Treasury yields rise to highest levels of year after CPI inflation report

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