2-year Treasury yield falls to lowest level of month as traders look past December inflation data

What happened

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  slipped 11.1 basis points to 4.258% from 4.369% on Wednesday. That’s the lowest level since Dec. 29, based on 3 p.m. Eastern time figures from Dow Jones Market Data.

• The yield on the 10-year Treasury
  BX:TMUBMUSD10Y
  fell 5.5 basis points to 3.974% after factoring in reopening levels. Thursday’s level is the lowest since Jan. 3.

• The yield on the 30-year Treasury
  BX:TMUBMUSD30Y
  declined 2 basis points to 4.18% from 4.2% late Wednesday.

What drove markets

Data released on Thursday showed that the December consumer-price index came in hotter than expected, producing an annual headline rate of 3.4% and monthly rise of 0.3%. The annual core reading, which strips out volatile items such as energy and food, rose to 3.9%, while economists were expecting 3.8%.

The report did little to budge the market’s narrative about the timing and extent of interest rate cuts from the Federal Reserve. After the report, fed funds futures traders boosted the likelihood of a quarter-of-a-percentage-point rate cut by March to 68.1% from 64.7% a day ago, according to the CME FedWatch Tool. That’s after factoring in a 95.3% probability that the Fed will leave interest rates unchanged at between 5.25% and 5.5% on Jan. 31.

The central bank is now mostly expected to deliver six or seven quarter-point rate cuts by December, which would take the fed-funds rate target down to 3.75-4% or even lower.

In an interview with Bloomberg Television on Thursday, Cleveland Fed President Loretta Mester threw cold water on market expectations of an interest-rate cut as soon as March.

Treasury’s $21 billion sale of 30-year bonds went “fairly well” and was met with decent demand, according to Gregory Faranello, head of U.S. rates trading and strategy at AmeriVet Securities in New York. The 1 p.m. Eastern time sale drew a bid-to-cover ratio of 2.37 that was down only slightly from last month, but still in line with the average seen over the past couple of years, he said via phone. It came a day after a $37 billion sale of 10-year notes, which also drew decent demand.

In other economic data on Thursday, initial jobless benefit claims inched down by 1,000 to 202,000 for the week that ended Jan. 6.

What investors are saying

“In my view, this uptick in CPI is a critical reminder of the unpredictable nature of economic recovery and the murkiness of the macroeconomic data,” said Jon Maier, chief investment officer at Global X, with $39 billion in managed assets.

“It suggests that investors might need to temper their expectations and remain vigilant,” Maier wrote in an email. “Markets may need to brace for potential volatility, as the Fed could maintain or potentially intensify its restrictive monetary policy stance in response to these inflationary pressures.”