Most Treasury yields fell on Wednesday, led by declines in the 2- and 3-year rates, after data showed U.S. consumer prices rose more slowly in March.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.016%
fell to 3.987% from 4.056% on Tuesday. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.415%
slipped to 3.402% from 3.433% as of Tuesday afternoon. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.632%
was 3.647%, up slightly from 3.621% late Tuesday.
What’s driving markets
Data released on Wednesday showed that U.S. inflation remains stubbornly persistent, even though prices are rising more slowly. Consumer prices rose a scant 0.1% in March due mostly to lower energy prices, below the 0.2% increase forecasted by economists polled by The Wall Street Journal. Meanwhile the annual rate of inflation slowed to 5% from 6%, touching the lowest level in almost two years.
The so-called core rate of inflation that omits food and energy rose a sharper 0.4%, matching forecasts, while the increase in the core rate over the past 12 months moved up to 5.6% from 5.5%.
After the data release, traders priced in a slightly higher chance that Federal Reserve policy makers will pause its interest rate hikes next month. The chance of a pause in May was seen at 32.8%, up from 27.1% a day ago. But there was also a 67.2% probability that the Fed will raise rates by another 25 basis points to between 5% to 5.25% on May 3, according to the CME FedWatch tool.
The central bank is expected to cut its policy interest rate by December, according to 30-day Fed Funds futures.
Minutes of the Federal Reserve’s March policy meeting will be published at 2 p.m. Eastern time.
What analysts are saying
“This report leaves little doubt that the disinflationary process is well underway,” said Gregory Daco, chief economist at EY-Parthenon, the global strategy consulting arm of Ernst & Young.
“Looking ahead, we foresee headline CPI inflation falling to 2.7% y/y by Q4 2023 while core inflation is expected to moderate to 3.3% y/y,” Daco said. “With the Fed adopting a dual track approach distinguishing monetary policy tools from macro-prudential tools, we anticipate a final 25bps rate hike in May. This would bring the terminal fed funds rate range to 5.00-5.25% in line with the FOMC statement that ‘some additional policy firming may be appropriate.’”
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