U.S. government debt rallied Wednesday morning, sending 1- through 30-year Treasury yields slightly lower ahead of the December consumer price index report in the next trading session.
What’s happening
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
dipped 3.7 basis points to 4.333% from 4.370% on Tuesday. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
fell 1.9 basis points to 3.997% from 4.016% on Tuesday. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
slipped 1.5 basis points to 4.167% from 4.182% on Tuesday.
What’s driving markets
Bond markets were calm Wednesday morning as investors established positions ahead of the December inflation report due on Thursday morning. The data represents “the final major round of fundamental inputs” for markets to assess through Jan. 31, according to BMO Capital Markets strategists.
Economists expect annual headline CPI inflation, which has been falling from a peak of 9.1% reached in mid-2022, to inch up to 3.2% last month
from 3.1% in November. However, the core reading, which strips out more volatile items like food and energy, is expected to decline to 3.8% from 4% previously.
See also: These traders bet on surprise blip higher in key December inflation reading
On Wednesday, fed funds futures traders priced in a 95.3% probability that the Fed will leave interest rates unchanged at between 5.25%-5.5% on Jan. 31, according to the CME FedWatch Tool. The chance of at least a 25-basis-point rate cut by March was seen at 71.4%, and the central bank is mostly expected to take its main policy rate target down to 4%-4.25% or lower by December.
Treasury will auction $37 billion of 10-year notes at 1 p.m. Eastern time on Wednesday.
What strategists are saying
“The Treasury market has continued the process of consolidation ahead of tomorrow’s CPI release,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery. “The overnight session showed a further grind lower in yields, although it remains a decidedly in-range move as 10-year rates slip back into 3-handle territory.”
“The technical landscape continues to improve in favor of lower yields as well,” they wrote in a note. “This week’s modest decline in rates has allowed momentum to pull back from the bearish extremes and provides a reasonable setup for a more balanced response to the December inflation update.”
