Ten-year Treasury yield dips below 3.9% as U.K. inflation falls to slowest pace in two years
Government-bond yields in the U.S. and the U.K. fell Wednesday morning after lower-than-expected inflation in Britain fueled hopes of easing price pressures and of interest-rate cuts by central banks.
What’s happening
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
dipped 5.5 basis points to 4.382%, from 4.437% on Tuesday. -
The yield on the 10-year Treasury
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fell 2.5 basis points to 3.896%, from 3.921% Tuesday afternoon. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
retreated 1.8 basis points to 4.017%, from 4.035% late Tuesday.
What’s driving markets
Government-bond yields fell early Wednesday, after a report showed annual inflation in the U.K. eased to 3.9% in November, its slowest pace in more than two years. The rate had been expected to come in at 4.4%, according to a poll by the Wall Street Journal.
The U.K. data reinforced investors’ hopes that price pressures continue to wane in developed economies and that central banks can swiftly cut borrowing costs next year, despite protestations to the contrary by several U.S. Federal Reserve officials.
The 10-year U.S. Treasury yield slipped back below 3.9%, near its lowest level since July, while the yield on equivalent-maturity British gilts
BX:TMBMKGB-10Y
tumbled 11.1 basis points to 3.547%, one of the lowest levels since April, as investors priced in a sooner-than-expected shift toward cutting rates by the Bank of England.
German
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and Japanese
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10-year yields also fell sharply, the latter of which was helped by the Bank of Japan’s decision earlier this week to maintain its ultraloose monetary stance.
In U.S. data released on Wednesday, existing-home sales unexpectedly inched up by 0.8% in November to 3.82 million, and the consumer-confidence index jumped to 110 in December. At 1 p.m. Eastern time, the Treasury will auction $13 billion worth of 20-year bonds.
For now, markets are pricing in an 87.6% probability that the Fed will leave interest rates unchanged at between 5.25% and 5.50% on Jan. 31, according to the CME FedWatch Tool. The chance of at least a 25-basis-point rate cut by March is seen at 79%, up from 27.5% a month ago.
What economists are saying
“Our inflation forecasts point to a rise in inflation the next two months, so we think the market expectations for a rate cut in March are overdone,” said chief U.S. economist Ellen Zentner and others at Morgan Stanley
MS,
“We think it will take until June for the Fed to have clear and convincing evidence inflation will return to the 2% target, and therefore begin cutting rates,” they wrote in a note. To get a rate cut in March, “we think we would need to see less than 50K for Feb nonfarm payrolls AND core CPI below 0.2% month on month.”
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