Bond Yields Fall as Investors Await Inflation Data

Bond yields experienced a decline early Tuesday amidst tentative trading, as investors eagerly awaited consumer inflation data. The benchmark 10-year Treasury yield has steadily decreased by approximately 80 basis points since reaching a 16-year peak slightly above 5% in October. This decline is due to expectations of cooling inflation, which may provide the Federal Reserve with the opportunity to lower interest rates next year.

Bond bulls will closely monitor the release of the November Consumer Price Index (CPI) report, scheduled for Tuesday at 8:30 a.m. Eastern Time. The hope is that the report will support the ongoing narrative of continued disinflation within the U.S. economy, leading up to the Fed's policy decision on Wednesday.

Economists anticipate that the November headline month-on-month CPI will remain unchanged, mirroring the figures from October. Additionally, they predict that the annual rate will dip to 3.1% from 3.2%. However, the core CPI, which excludes volatile items such as food and energy, is forecasted to rise by 0.3% compared to the previous month's 0.2%, while the annual rate is expected to remain at 4%.

Market projections currently indicate a 98% likelihood that the Fed will maintain its interest rates at a range of 5.25% to 5.50% after its upcoming meeting on Wednesday. Furthermore, there is a 94% probability that rates will remain unchanged in January, based on data from the CME FedWatch tool.

Considering future meetings, the chances of a minimum 25 basis point rate cut during the March session are priced at 49.4%, reflecting a substantial increase from 12.4% just one month ago.

Treasury Auction and Market Observations

Traders will be closely watching the Treasury auction of $21 billion worth of 30-year bonds today at 1 p.m. Last month's auction did not go as well as expected, with investors demanding a yield 5 basis points higher than the pre-sale level. This led to a significant increase in Treasury yields, rising by over 21 basis points at one point before settling up 15 basis points. Although the bond market has seen significant changes since then with a massive rally, it is still crucial to keep an eye on today's auction.

Central Banks' Policy Rates

The European Central Bank and Bank of England are both expected to maintain their policy rates unchanged on Thursday.

Analysts' Views on Inflation

Analysts hold different views on inflation. Stephen Stanley, the chief U.S. economist at Santander, believes that there is a widely held perception that core inflation is declining towards a 2% rate. However, he argues that even at face value, this may exaggerate the level of improvement. Stanley points out that after two consecutive low readings in June and July caused by significant drops in airfares, the core Consumer Price Index (CPI) has actually risen at a 3.4% annualized rate over the past three months. While this shows a positive deceleration compared to a year ago, it is still far from the range that would justify the Federal Reserve declaring victory.