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Bond Report: 10-year Treasury sees biggest daily yield rise in 8 weeks as U.S. inflation rises to 13-year high

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Treasury yields climbed for a fourth straight session and long-dated yields on Wednesday rose by the most since around mid-March, after data showed that the U.S. rate of inflation rose to the highest level in nearly 13 years in the aftermath of the Covid pandemic, as businesses grappled with supply shortages that are raising the cost of many goods and services.

How are Treasurys trading?
  • The 10-year Treasury note
    TMUBMUSD10Y,
    1.697%

    was at 1.693% at 3 p.m. Eastern Time, picking up 7 basis points on the session.
  • The 30-year Treasury bond
    TMUBMUSD30Y,
    2.416%

    was at 2.415%, gaining 6.3 basis points
  • The 2-year Treasury note
    TMUBMUSD02Y,
    0.156%

    was trading at 0.167%, representing a more muted 0.8 basis point rise for short-term rates.

The 10-year Treasury notched its biggest daily climb since March 18, while it was the biggest rate jump for the 30-year long bond since March 12, driving it to its highest yield since March 31

What’s driving the fixed-income market?

Concerns over inflation were renewed on Wednesday after the consumer-price index soared 0.8% in April to match the biggest monthly increase since 2009, the government said Wednesday. Economists polled by Dow Jones and The Wall Street Journal had forecast a milder 0.2% advance.

The rate of inflation over the past year jumped to 4.2% from 2.6% in the prior month—the highest level since 2008. The pace of inflation has surged after years of languishing at unusually low levels.

A sustained bout of inflation could cause the Federal Reserve to move more rapidly to withdraw its easy-money policies and bond-buying programs that have helped to support financial markets since the pandemic took hold in the U.S. last year, analysts believe.

Federal Reserve Vice Chairman Richard Clarida on Wednesday, after the CPI data was released, said that he was more worried about the health of the U.S. labor market than high inflation.

“The near-term outlook for the labor market appears to be more uncertain than the outlook for activity,” Clarida said, in remarks at the start of a discussion of the outlook with the National Association for Business Economics.

He did, however, say that the CPI data was a bit of a surprise but emphasized that he viewed the move as temporary.

“I expect inflation to return to – or perhaps run somewhat above – our 2% longer-run goal in 2022 and 2023,” he said. This would fit under the Fed’s new policy framework, he noted.

The Fed has said it would maintain its low interest rate policy until more progress is made on reducing unemployment while achieving its inflation goal.

Despite the hotter-than-expected inflation report, traders said that a $41 billion auction of 10-year debt, which was closely watched for its impact on the overall market, went well.

What are strategists and traders saying?

“This data is supportive of the idea that near-term demand / supply imbalances associated with bottlenecks in the goods pipeline and labor shortages and other frictions in services sectors facing a release of pent-up demand are generating bigger and broader upward pressures on prices than the Fed likely anticipated,” wrote Krishna Guha, a former top official at the New York Fed and now Vice chairman of Evercore ISI.

“The question is how much implication this has for monetary policy. Our view is—as implausible as this may seem—not much, subject to an important caveat centered on inflation expectations,” he said.

“Bottom line, notwithstanding the very hot CPI print, buyers took advantage of the highest 10 yr yield in 5 weeks,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, in a daily research note.

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