MARKET

Treasury yields end at lowest levels in five months or more as U.K. inflation decelerates


Government-bond yields in the U.S. and the U.K. finished lower on Wednesday after the latest inflation report from Britain fueled hopes for continued easing in price pressures and interest-rate cuts by central banks.

What happened

  • The yield on the 2-year Treasury
    BX:TMUBMUSD02Y
    dropped 7 basis points to 4.367%, from 4.437% on Tuesday. Wednesday’s level is the lowest since June 1, based on 3 p.m. figures from Dow Jones Market Data.

  • The yield on the 10-year Treasury
    BX:TMUBMUSD10Y
    fell 4.5 basis points to 3.876%, from 3.921% Tuesday afternoon.

  • The yield on the 30-year Treasury
    BX:TMUBMUSD30Y
    retreated 3.1 basis points to 4.004%, from 4.035% late Tuesday.

  • Wednesday’s levels are the lowest for the 10- and 30-year rates since July 26.

What drove markets

Government-bond yields fell on Wednesday, after a report showed annual inflation in the U.K. eased to 3.9% in November, its slowest pace in more than two years. The rate had been expected to come in at 4.4%, according to a poll by The Wall Street Journal.

The U.K. data reinforced investors’ hopes that price pressures continue to wane in developed economies and that central banks can swiftly cut borrowing costs next year, despite protestations to the contrary by several U.S. Federal Reserve officials.

The 10-year U.S. Treasury yield slipped back below 3.9%, while the yield on equivalent-maturity British gilts
BX:TMBMKGB-10Y
tumbled 13.3 basis points to 3.525%, one of the lowest levels since April, as investors priced in a sooner-than-expected shift toward cutting rates by the Bank of England.

German
BX:TMBMKDE-10Y
and Japanese
BX:TMBMKJP-10Y
10-year yields also fell sharply, the latter of which was helped by the Bank of Japan’s decision earlier this week to maintain its ultraloose monetary stance.

In U.S. data released on Wednesday, existing-home sales unexpectedly inched up by 0.8% in November to an annualized 3.82 million, and the consumer-confidence index jumped to 110 in December. Treasury’s $13 billion auction of 20-year bonds came in soft, according to strategist Ben Jeffery of BMO Capital Markets.

Traders priced in an 88.6% probability that the Fed will leave interest rates unchanged at between 5.25%-5.5% on Jan. 31, according to the CME FedWatch Tool. The chance of at least a 25-basis-point rate cut by March was seen at 80.5%, up from 27.5% a month ago.

What economists are saying

“Our inflation forecasts point to a rise in inflation the next two months, so we think the market expectations for a rate cut in March are overdone,” said chief U.S. economist Ellen Zentner and others at Morgan Stanley, in a note.

“We think it will take until June for the Fed to have clear and convincing evidence inflation will return to the 2% target, and therefore begin cutting rates,” they wrote. To get a rate cut in March, “we think we would need to see less than 50K for Feb nonfarm payrolls AND core CPI below 0.2% month on month.”



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