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U.S. bond yields inch higher as attention turns to looming inflation data


U.S. bond yields were a touch higher Wednesday but off recent highs as investors absorbed the midterm election results and awaited October inflation data due on Thursday.

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Treasury yields inched higher on Wednesday as traders turned their attention to Thursday’s October consumer price inflation data and digested the results of the midterm U.S. elections.

Yields had slipped from near cycle highs in the previous session as the market priced in the likelihood that the elections would deliver a gridlocked Washington that reduced the chances of further government spending that may add to inflationary pressures.

But some analysts argued that looming inflation data remained the most important factor currently, and any focus on the political sphere was probably overstated.

“As far as market impacts, we do not think there would be a seismic shift due to a gridlock in Congress – high levels of inflation already made the passage of further spending packages less likely,” said Jan Nevruzi, U.S. rates strategist at NatWest Markets.

The U.S. consumer price index data will be published on Thursday, and bond investors will be hoping it can show inflation pulling back from near 40-year highs, enabling the Federal Reserve to consider slowing its pace of interest rate increases.

“Our U.S. Economics team expects a slowdown in core CPI MoM figure to 0.4% from 0.6% print in the last two months (consensus: 0.5% MoM),” wrote a Citi strategy team led by Luis E. Costa.

“If so, it could mean another leg in this risk-on rally, as a 50bp hike in December will become the most likely scenario for Fed, justified by emerging signs of price dynamics getting on a stable path quicker.” the Citi team added.

Markets are pricing in a 54% probability that the Fed will raise interest rates by another 50 basis points to a range of 4.25% to 4.50% after its meeting on December 14th. A 75 basis point rise to 4.5% to 4.75% is given a 46% chance.

The central bank is expected to take its Fed funds rate target to 5.1% by July 2023, according to the CME FedWatch tool.

Meanwhile, news out of China suggested declining inflationary pressures in the pipeline for goods as factory gate prices in the world’s biggest manufacturer fell for the first time in two years last month.

The Treasury is due to auction $35 billion of 10-year bonds on Wednesday. “Since last month’s auction, 10s have cheapened almost 20 bps. Volatility has declined somewhat as the economic data has become somewhat more mixed,” noted Thomas Simons, money market economist at Jefferies.

“In our view, 10s are very rich against 5s and 30s…but that doesn’t mean that the bid that has been persistently driving the market since early Tuesday won’t continue,” he added.


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