Bond traders have plenty on their plates the next couple days, even after they absorb a crucial US inflation reading that stands to shape expectations for Federal Reserve policy for months to come.
All eyes are on February’s consumer-price index, to be released at 8:30 a.m. Washington time Tuesday, arguably the most significant report left before the Fed meets next week. Treasuries are coming off two months of losses, and traders are on high alert for a repeat of four weeks ago, when a surprisingly sticky CPI figure battered bonds. After the economy was wracked by the highest inflation in decades, investors have been pleasantly surprised by how quickly it’s receded, so last month was a rude awakening.
A hot reading Tuesday isn’t the base-case for most economists. But it’s a scenario that risks roiling Treasuries by pushing traders to bet the Fed will wait until later in the year to cut rates. Such an outcome would complicate the setup for a duo of long-term government-debt auctions ahead this week: a $39 billion reopening of 10-year notes at 1 p.m. Tuesday and a $22 billion reopening of 30-year bonds Wednesday.
“CPI days have produced outsize moves in general, and auctions have done better on low volatility days,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.
Last month, the 10-year yield jumped after the consumer-price report caught traders off guard. It rose 13 basis points, the second-most since at least 2014 for the day of a CPI announcement, according to data compiled by Bloomberg based on closing prices.
At around 4.10%, 10-year yields are near their lowest levels since early February. They’re still up relative to year-end, however, leaving the Treasury market down 0.6% this year through last week, data compiled by Bloomberg show. The 10-year yield dipped toward 4% Friday after jobs data showed softer wage growth, a higher unemployment rate and downward revisions to the prior release.
The expectation for Tuesday’s report is that it will show US inflation cooled only gradually last month, backing up the Fed’s approach of signaling that it intends to keep interest rates higher for longer.
The core consumer price index, which excludes food and fuel, is projected to have risen 0.3% in February from a month earlier after a 0.4% increase in January, a Bloomberg survey of economists shows. On an annual basis, core prices likely rose 3.7%, the poll shows, which would be the smallest jump since 2021.
Auction Maneuvering
Headline CPI, which reached 9.1% in 2022, receded to 3.1% in November, boosting expectations for Fed rate cuts and pulling yields on 10-year Treasuries below 4% as the year ended. But CPI has stopped falling, sparking concern that it may even re-accelerate.
That backdrop has traders on edge before this week’s auctions.
The bond market usually seeks a concession ahead of government debt sales — meaning it knocks prices down — to facilitate a smoother reception, and that process may prove tougher should the report show CPI cooling. Meanwhile, an upside surprise in the inflation trend could make the sales easier to digest by pushing yields higher.
“A less friendly inflation reading for markets likely brings a concession outright into the auctions but with more volatility,” AmeriVet’s Faranello said. Meanwhile, “friendly data and a further move lower in yield will likely run into resistance ahead of the auctions, but make for a better environment overall.”
On Monday, early selling in short-dated Treasuries helped the market digest a $56 billion three-year sale at a yield below the pre-auction level.
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