Credit: REUTERS/Yuriko NakaoBy Gertrude Chavez-Dreyfuss
NEW YORK, Nov 10 (Reuters) - U.S. Treasury yields plunged on Thursday after data showed U.S. inflation cooled in October, supporting expectations the Federal Reserve could slow its tightening pace.
The U.S. 10-year yield dropped to a five-week low of 3.818%. It was last down 32 basis points (bps) at 3.8218% US10YT=RR, its largest daily fall since March 2009.
The U.S two-year yield, which reflects rate move expectations, slid to a more than one-week low of 4.29% and was last down 29.8 bps at 4.33% US2YT=RR. The yield posted its biggest daily decline since September 2008.
Data showed the U.S. consumer price index rose 0.4% in October after climbing by the same margin in September. Economists polled by Reuters had forecast the CPI would advance 0.6%. In the 12 months through October, the CPI increased 7.7% after rising 8.2% on the same basis in September.
Excluding the volatile food and energy components, core CPI increased 0.3% last month after gaining 0.6% in September. Economists expected core CPI to gain 0.6%.
The report is the strongest indication yet that inflation may be turning the corner, analysts said.
"It's a reset and 'confirmation' of expectations. The market had started to reprice Fed expectations after the Nov. 2 Fed meeting," said Kim Rupert, managing director, fixed income, at Action Economics in San Francisco.
"The market is looking for signs that inflation is coming down. And the data may be the first indication that that is starting to happen. So that supports expectations that the Fed can start to slow rate hikes to 50 basis points next month," she added.
The rates futures markets have priced in a 73.5% chance of a 50-basis-point hike in December, and a 63.5% probability of an increase of the same magnitude in the February meeting. FEDWATCH
The Fed's terminal rate, or the level at which interest rates would peak, fell to 4.85%. It was at 5% and higher last week.
"We expect this (the data) to mark the start of a much longer disinflationary trend that we think will convince the Fed to halt its tightening cycle early next year, with the policy rate peaking at 4.50% to 4.75%, and to begin cutting rates again before the end of 2023," he added.
Federal Reserve Bank of Cleveland President Loretta Mester said Thursday that while there are some new hopeful signs of moderating inflation, the main risk still facing the U.S. central bank is that it doesn't act aggressively enough to tame very high price pressures.
Thursday's Treasury auction of $21 billion in U.S. 30-year bonds was well-received, clearing at 4.08%, lower than the expected rate at the bid deadline, suggesting increased demand. Investors were happy to get a lower yield to get the bond.
Post-auction, U.S. 30-year yields fell 22.4 bps to 4.094% US30YT=RR. The yield sank to a three-week low of 4.05%, posting its biggest daily drop since March 2020.
"In addition to short-covering and a general over reaction to a 0.27% core number last month, the lack of meaningful price resistance played a role in the size of today's Treasury rally," wrote Jim Vogel, senior rates strategist, at FHN Financial in Memphis, Tennessee.
"The last resistance of any note was 3.910% (in the 10-year and it fell in the first 30 minutes after the (CPI) release."
November 10 Thursday 4:19PM New York / 2119 GMT
Price
Current Yield %
Net Change (bps)
Three-month bills US3MT=RR
4.0825
4.1804
-0.023
Six-month bills US6MT=RR
4.395
4.555
-0.066
Two-year note US2YT=RR
100-20/256
4.3321
-0.296
Three-year note US3YT=RR
100-224/256
4.1866
-0.341
Five-year note US5YT=RR
100-200/256
3.9497
-0.333
Seven-year note US7YT=RR
100-168/256
3.8912
-0.323
10-year note US10YT=RR
102-120/256
3.8256
-0.316
20-year bond US20YT=RR
88-116/256
4.2439
-0.280
30-year bond US30YT=RR
81-204/256
4.0591
-0.260
DOLLAR SWAP SPREADS
Last (bps)
Net Change (bps)
U.S. 2-year dollar swap spread
36.75
1.75
U.S. 3-year dollar swap spread
16.75
2.50
U.S. 5-year dollar swap spread
6.75
1.75
U.S. 10-year dollar swap spread
0.50
1.00
U.S. 30-year dollar swap spread
-49.00
0.50
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Jane Merriman, Jonathan Oatis, Chris Reese and Richard Chang)
((gertrude.chavez@thomsonreuters.com; 646-301-4124; Reuters Messaging: gertrude.chavez.reuters.com@reuters.net))
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