adminTreasurys rallied on Wednesday, sending yields lower, as traders considered whether there may have been an overreaction in the prior session to January’s stronger-than-expected consumer-price index.
What happened
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The yield on the 2-year Treasury
BX: TMUBMUSD02Y
dropped 7.8 basis points to 4.576% from 4.654% on Tuesday. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX: TMUBMUSD10Y
fell 4.9 basis points to 4.266% from 4.315% on Tuesday. -
The yield on the 30-year Treasury
BX: TMUBMUSD30Y
declined 1.9 basis points to 4.447% from 4.466% on Tuesday. - All three yields finished at their second-highest levels of this year, according to 3 p.m. Eastern time figures from Dow Jones Market Data.
What drove markets
Investors continued to digest the implications of a hotter-than-expected inflation report released Tuesday, and appeared to conclude that yesterday’s selloff in bonds and stocks may have been overdone.
The consumer-price index for January rose by 3.1% year-over-year, above economists’ forecast for a 2.9% gain — sparking a sharp selloff in bonds on Tuesday that pushed the 10-year yield back to 4.315% for the first time since Nov. 30.
Traders have since readjusted their expectations on the timing and extent of Federal Reserve rate cuts. Markets are now pricing in an 81.8% probability of at least a quarter-point rate cut from the Fed by June, according to the CME FedWatch Tool. Traders see an 87.8% chance of at least three cuts by December.
U.K. government bonds outperformed, with the 10-year gilt yield
BX: TMBMKGB-10Y
dropping 11.2 basis points to 4.044%, after data released on Wednesday showed Britain’s consumer-price inflation held steady, with a gain of 4% on the year as of January.
What analysts are saying
“Yesterday’s CPI release was a nasty shock causing a significant market reaction. The question now is whether the reaction was enough, or perhaps was too much,” said Chris Low, chief economist at FHN Financial in New York.
Though there are reasons to think the report could be a “fluke,’’ “the report cannot be dismissed outright, not least because it firmly underscores the Fed’s primary objection to quick easing. With the economy strong and the job market strong, there is no need for rate cuts,” he wrote in a note.
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