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Bond Report: Treasury yields stabilize after drop on CPI data

Treasury yields were slightly higher Wednesday, with the market largely holding steady after Tuesday’s cooler-than-expected reading of the U.S. August consumer-price index triggered a rally that gave long-end yields their largest daily drops in a month.

What are yields doing?

The 10-year Treasury note yield
TMUBMUSD10Y,
1.300%

rose 2.6 basis points to 1.302%, compared with 1.276% at 3 p.m. Eastern on Tuesday. Yields and debt prices move in opposite directions.

The 2-year Treasury note yield
TMUBMUSD02Y,
0.217%

climbed less than 1 basis point to 0.213% from 0.207% late Tuesday.

The 30-year Treasury bond yield
TMUBMUSD30Y,
1.867%

advanced 1.8 basis points to 1.868%, versus 1.85% late Tuesday.

The 10- and 30-year rates each snapped a two-day losing streak, while the 2-year note posted its largest one-day yield gain in a week, based on 3 p.m. levels, according to Dow Jones Market Data.

What’s driving the market?

Treasury yields stabilized after having declined on Tuesday following data showing the August CPI rose at a weaker-than-expected 5.3% pace year-over-year from 5.4% in July. That is the first slowdown since last October. The core rate, which leaves out volatile food and energy prices, slowed to 4% from a July reading of 4.3%.

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

Economic reports released on Wednesday offered traders little in the way of direction.

Import prices fell in August for the first time in 10 months as inflationary pressures eased: They dropped 0.3% last month in a sign that inflation is starting to cool after run-up earlier this year. Meanwhile, the New York Fed’s Empire State business conditions indexfor September surged 16 points to 34.3, beating the 17.2 estimate of economists surveyed by the Wall Street Journal.

Industrial production rose 0.4% in August, down from a revised 0.8% gain in the prior month, after shutdowns related to Hurricane Ida held down production, according to the Fed. Industrial capacity in use rose to 76.4% in August from 76.2% in the prior month.

What are analysts saying?

The inflation data doesn’t change anything regarding the timing of the Fed’s tapering decision, “as suggested by the negligible movement in UST real yields,” UniCredit analysts wrote in a note. “Investors will now turn to scrutinizing economic data, and most importantly labor market data, which will be crucial in determining the timing of tapering and the performance of UST real yields going forward.”

“We’re not likely to get much new in terms of taper timing from the FOMC next week,” Jonathan Cohn, Credit Suisse’s head of rates trading strategy, said via phone Wednesday. “What we will get is a new dot plot and in that new dot plot is where the intrigue lies.”

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