Bond Market Update

Data Recon

• U.S. Treasuries have risen off their opening levels after the November CPI report matched expectations at the headline (0.3%) and core levels (0.3%), which is not upsetting expectations for a 25-basi point rate cut from the FOMC next week. The post-data bounce has been led by shorter tenors with the 2-yr note now firmly in the green while the long bond is approaching its unchanged level.
• Total CPI was up 0.3% month-over-month in November, as expected, leaving the year-over-year rate up 2.7%, versus 2.6% in October. Core CPI, which excludes food and energy, was up 0.3% month-over month, as expected, leaving the year-over-year rate up 3.3%, unchanged from October.
  • There are two key takeaways from the report that might help explain the positive reaction to the otherwise concerning headline numbers. The first is that the report wasn't worse than feared. It was right in-line with expectations; therefore, it did not upset the market's view that the Fed will cut rates another 25-basis points at next week's FOMC meeting. The second key takeaway is in the breakdown of the shelter index (+0.3%), which included the smallest increases for owners' equivalent rent (+0.2%) and the index for rent (+0.2%) since April 2021 and July 2021, respectively. With the lag effect of shelter costs on CPI computations, assumptions are being made that this variable will continue to factor favorably in future CPI reports and help temper future inflation readings.
• Yield Check:
  • 2-yr: -4 bps to 4.11%
  • 3-yr: -5 bps to 4.06%
  • 5-yr: -3 bps to 4.07%
  • 10-yr: -1 bp to 4.21%
  • 30-yr: +1 bp to 4.42%