Long-end Treasury yields post biggest drop in a month as traders recalibrate expectations for Fed's next hiking cycle

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By Vivien Lou Chen and William Watts

Treasury yields fell across the curve Tuesday, with long-end maturities posting their biggest one-day drops in a month, as investors lowered their expectations for the Federal Reserve’s next tightening cycle on signs of moderating inflation in the U.S.

What are yields doing?

What’s driving the market?

U.S. government bonds rallied on Tuesday’s data, pulling yields lower across the curve, as traders took out some inflation premium and reduced their expectations for how soon the Fed could start lifting interest rates, as well as by how much.

Read: August U.S. inflation reading eases bond market’s worry about extent of Fed’s next tightening cycle

The consumer price index climbed 0.3% in August, compared to a rise of 0.5 % in July, the government said Tuesday. Economists polled by The Wall Street Journal had expected a 0.4% rise in August. Meanwhile, the rate of inflation over the past year slipped to 5.3% in August from 5.4%. It was the first decline since last October.

Read:Surge in U.S. consumer prices slows in August, CPI shows. Has inflation peaked?

Tuesday’s data prompted traders to push out their expectations for the timing of the Fed’s first rate hike, and to lower the anticipated terminal fed funds rate. However, analysts said bond investors may be overreacting to the inflation report, and could be underestimating the persistency of underlying pressures.

Until recently, much of the attention leading up to next week’s Federal Open Market Committee meeting in Washington has been on the prospects for paring back on $120 billion in monthly bond purchases. But investors also have their eye on policy makers’ interest-rate projections for 2024, which are being added for the first time. So far, Fed officials have penciled in two rate hikes for 2023 and a fed funds rate that hits 2.5% in the longer term. Meanwhile, expectations that the Fed could use next week’s meeting to announce a timetable for the tapering process have faded, with November now seen as more likely.

See:Online traders see little chance of a Fed tapering announcement at next week’s meeting

In other U.S. economic data, the National Federation of Independent Business said its small-business optimism index rose 0.4 points in August to 100.1. Small-business owners said they were a bit more optimistic about the economy in August, the survey found, but complained that record shortages of labor and supplies were cutting into sales and profits, and hindering the recovery from the pandemic.

-Vivien Lou Chen

What are analysts saying?


(END) Dow Jones Newswires

09-14-21 1544ET

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