Investing.com - U.S. Treasury yields spiked across the curve on Tuesday after a hotter-than-expected October inflation report shattered fixed-income desks' hopes that plunging global oil prices would sustainably cool domestic price pressures.
The robust data, arriving on the heels of a blockbuster employment report, cemented market expectations that the Federal Reserve will raise interest rates again next month.
The policy-sensitive two-year Treasury yield, which closely tracks short-term interest rate expectations, bore the brunt of the selling pressure, jumping 8.6 basis points from 4.628% to 4.714%.
The benchmark 10-year Treasury note followed closely, with its yield surging 7.4 basis points from 4.875% to 4.949%. At the long end of the curve, the 30-year Treasury yield spiked 4.5 basis points, rising from 5.259% to 5.304%.
The pronounced upward shift across the curve - led by the front end - reflects investors rapidly pricing out the possibility of a near-term macroeconomic slowdown and adjusting their portfolios for a persistently restrictive monetary environment.
The pronounced upward shift in the 10-year yield reflects investors rapidly pricing out the possibility of a near-term macroeconomic slowdown, adjusting their term premiums to account for a persistently restrictive monetary environment.
Hot CPI print overrides relief from tumbling oil
The catalyst for the violent repricing in sovereign debt was a consumer price index (CPI) report that exceeded economist forecasts across the board.
U.S. headline CPI rose 0.4% month-over-month, coming in hotter than the expected 0.3%. Core CPI, which strips out volatile food and energy components, also accelerated, printing at 0.3% month-over-month against expectations of 0.2%.
The upside surprise delivered a sharp reality check to bond traders who had spent the early part of the week hoping that a massive collapse in global crude oil prices would provide a powerful disinflationary buffer. While Brent crude futures have plunged below $92 a barrel to their lowest levels since early September—driven by hopes of diplomatic talks between the U.S. and Iran—the sticky core inflation data demonstrated that underlying domestic price pressures in the U.S. remain stubbornly entrenched regardless of energy inputs.
Blowout jobs data and inflation force Fed's hand
Tuesday's inflation shock lands like a one-two punch following last Friday's blowout October jobs report, where the U.S. economy unexpectedly added 165,000 payrolls.
Together, the resilient labor engine and the accelerating consumer prices leave the Federal Reserve with little justification to pause its tightening campaign. The central bank raised borrowing costs for the first time in three years in September, and financial markets are now treating a follow-up December hike as a near certainty.
Following the CPI release, federal funds futures indicated that traders are pricing in an 84% probability of a U.S. rate hike next month, a sharp increase from 74% just a week earlier.
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