US Treasuries gained and traders boosted their bets on a Federal Reserve interest-rate reduction next week after a report showed consumer prices last month accelerated in line with expectations.
Yields on two-year notes, which are most sensitive to two central bank’s policy, reversed earlier increases to fall as much as five basis points to 4.10% on Wednesday. Traders priced in about 22 basis points worth of easing at the Fed’s December meeting, compared to 20 basis points prior to the report. Markets now see a almost a 90% probability the Fed will lower its benchmark by a quarter-point on Dec. 18.
“The FOMC will go ahead now and cut by 25 basis points next week,” Jay Bryson, Wells Fargo & Co. chief economist said on Bloomberg Television. “There’s nothing here to say the Fed won’t cut next week.”
The so-called core consumer price index — which excludes food and energy costs — increased 0.3% for a fourth straight month, Bureau of Labor Statistics figures showed. From a year ago, it rose 3.3%.
In the wake of the data and as expectations firmed up for a December rate cut, a flurry of buyers were seen in January and February fed funds futures — a move that implies some rising wagers on another Fed reduction to start 2025. Buying in both contracts has been a popular play since Friday’s mixed November employment report, helped by Morgan Stanley’s buy recommendation to target quarter-point easing at both the December and January policy meetings.
Still, some on Wall Street saw Wednesday’s figures as evidence the disinflation trend has stalled and that the Fed may look to hold rates steady after next week’s move.
“While today’s print was the last hurdle to clear for the Fed to cut next week,” the “recent upticks in inflation will make it hard for the Fed to guarantee a straightforward continuation of rate cuts in 2025,” said Lara Castleton, head of US portfolio construction and strategy at Janus Henderson Investors, which manages about $382 billion in assets. “Reignition of inflation is one of the top concerns for clients next year.”
Swaps traders see a cumulative 86 basis points worth of cuts by the end of 2025, implying that a quarter-point cut next week would be followed by roughly two more in 2025. That’s less than the four cuts Fed officials laid out in the latest update to their quarterly dot plot in September.
US equities rose on Wednesday, while the Bloomberg Dollar Spot Index trimmed earlier gains.
Auction Ahead
The benchmark 10-year note yield was little changed around 4.23%. This maturity had been supported following a large block buyer in 10-year note futures. The Treasury is slated to hold an auction of 10-year notes at 1 p.m. New York time.
The 10-year auction is a reopening of last month’s 10-year note auction, meaning it creates identical securities and the second of three coupon auctions this week. Tuesday’s sale of three-year notes nearly matched expectations. A 30-year bond reopening Thursday concludes the cycle.
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