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Bond Report: Long-dated Treasury yields post biggest weekly jump in months as U.S. inflation at highest level in nearly 40 years

U.S. Treasury yields were mixed Friday, but long-dated maturities posted the largest weekly rise in several months with data showing U.S. consumer inflation at the highest levels in almost 40 years.

The November CPI reading, which was not as high as some had feared, left yields mixed on the day. The report also solidified the view that the Federal Reserve will act more quickly to tighten monetary conditions when it meets next week.

What are yields doing?

The 10-year Treasury note yield
TMUBMUSD10Y,
1.484%

was little changed at 1.487%, compared with 1.486% on Thursday at 3 p.m. Eastern Time.

The 30-year Treasury bond rate
TMUBMUSD30Y,
1.883%

rose 1.7 basis points to 1.883%, up versus 1.865% a day ago.

The 10-year yield rose 14.5 basis points for the week, the biggest weekly gain since Feb. 19, based on 3 p.m. levels, according to Dow Jones Market Data. Meanwhile, the 30-year rate climbed 20.8 basis points this week, the largest weekly gain since Jan. 8.

The 2-year note yield
TMUBMUSD02Y,
0.660%

fell 2.4 basis points to 0.66%, compared with 0.684% on Thursday afternoon. It rose 7.1 basis points this week.

What’s driving the market?

A report on U.S. consumer inflation showed that the cost of living climbed in November, driving the year-over-year rate of inflation to 6.8%. That marked the highest level since 1982 and well exceeded the Federal Reserve’s 2% target.

However, the data brought a surprising sigh of relief in certain corners of the financial markets, where some had expected a headline year-over-year number closer to 7%.

For most investors, the difference between 6.8% and 7% might seem like a simple rounding issue, but for traders with money on the line, inflation has proven to be stronger and more durable than anticipated this year, and Friday’s reading carried the risk of another overshoot that couldn’t be ignored.

On a month-over-month basis, the CPI increased 0.8%, the government said Friday, coming in above estimates for a 0.7% advance. The 12-month increase in the core rate climbed to 4.9% from 4.6% and remained at a 30-year peak. The last time the core rate reached 5% was in mid-1991.

The inflation report highlights the pressure on households as they confront rising prices of gas, food, cars, and rent. In addition, the data could hamper President Joe Biden’s goal of passing a multitrillion-dollar social-spending package through Congress before the end of the year, as some U.S. senators fear fiscal stimulus is already overdone, Barron’s, MarketWatch’s sister publication, writes.

Higher consumer prices may also compel the Fed to move more quickly to end its market-supportive bond purchases. Markets expect the tapering of Treasurys and mortgage-backed securities purchases could be completed by March, with multiple interest rate hikes expected in 2022.

Last week, Fed Chairman Jerome Powell opened the door to the central bank moving more quickly on reducing its monthly bond purchases, given the persistent strength of inflation. There are fears that the omicron variant of the coronavirus that causes COVID-19 could intensify supply-chain bottlenecks that have contributed to higher prices.

In other data releases on Friday, a University of Michigan survey found that consumer sentiment rose to 70.4 in December from 67.4 in the prior month, but concerns about a wage-price spiral are looming.

What strategists are saying

“The inflation print was expected to be a little bit higher in some parts of the market, around 7%,” and the reason bonds ralliied Friday morning “is that there’s a bid for Treasuries, whether domestic or global,” said Rob Daly, director of fixed income for Glenmede Investment Management. “The market wants to own Treasuries into year-end, and this inflation print may have been welcomed by the market,” Daly said via phone.

“The yield curve reflects an overall perception that the Fed is going to tighten too fast,” according to Daly. “Do I agree with it now? No, but this is the reality of the market right now.”

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