Bond Market Update

Treasuries Slide Despite Solidifying Rate Cut Expectations

• U.S. Treasuries finished Wednesday with losses across the curve even though the highly anticipated November CPI report (0.3%; Briefing.com consensus 0.3%) matched expectations and showed the mildest increase in the shelter component since mid-2021. The trading day started with losses that were paced by the long bond, but the entire complex bounced in immediate reaction to the CPI report, which solidified the market's expectations for a 25-bps rate cut next week. The post-data bounce sent yields on 10s and shorter tenors back below their respective 50-day moving averages, but a pullback began brewing after the 2-yr yield approached its low from Monday. The pullback had longer tenors back at their opening lows before 11:00 ET while the short end held up better, but it too returned into negative territory later in the day. A strong $39 bln 10-yr note opening invited a brief afternoon bounce, but renewed pressure sent 5s and longer tenors to fresh lows into the close while the 2-yr note finished a bit above its starting low. The intraday volatility produced an eight-basis point swing in yields across the curve and did not get in the way of an equity rally that sent the Nasdaq to a fresh record high. Crude oil climbed for the third consecutive day, returning to its 50-day moving average (70.39), while the U.S. Dollar Index rose 0.3% to 106.71, reaching a two-week high.
• Yield Check:
  • 2-yr: +1 bp to 4.16%
  • 3-yr: +1 bp to 4.12%
  • 5-yr: +4 bps to 4.13%
  • 10-yr: +5 bps to 4.27%
  • 30-yr: +7 bps to 4.48%

• News:
  • OPEC reduced its global oil demand growth forecast for 2024 by 210 tb/d while the outlook for 2025 was trimmed by 90 tb/d.
  • German Chancellor Scholz formally requested a confidence vote, which could take place on Monday and is likely to lead to a snap election in February
  • China Securities Journal speculated that bigger cuts to interest rates, including the reserve requirement ratio, will be made next year.
  • South Korea's opposition party warned that it will keep calling for an impeachment of President Yoon every Saturday.
  • Japan's Prime Minister Ishiba said that a decision on tax reforms should be reached around the middle of December.
  • Japan's November PPI was up 0.3% m/m (expected 0.2%; last 0.3%), rising 3.7% yr/yr (expected 3.4%; last 3.6%). Q4 BSI Large Manufacturing Conditions rose to 6.3 from 4.5 (expected 1.8). December Reuters Tankan Index fell to -1 from 5. Q3 GDP External Demand was down 0.2% qtr/qtr (expected -0.4%; last -0.1%).
  • South Korea's November Unemployment Rate remained at 2.7%.
  • New Zealand's Q3 Manufacturing Sales Volume was down -1.2% qtr/qtr (last 0.6%).
• Today's Data:
  • 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.
  • The Treasury Budget for November showed a deficit of $366.8 billion compared to a deficit of $314.0 billion in the same period a year ago. The November deficit resulted from outlays ($668.5 billion) exceeding receipts ($301.8 billion). The Treasury Budget data are not seasonally adjusted so the November deficit cannot be compared to the October deficit of $257.5 billion.
    • The key takeaway from the report is its worsening condition, which was driven in part by a large outlay for net interest that exceeded the outlay for national defense.
  • Weekly crude oil inventories decreased by 1.43 mln barrels after decreasing by 5.07 mln barrels a week ago.
  • $39 bln 10-year Treasury note reopening results (prior 12-auction average):
    • High yield: 4.235% (4.234%).
    • Bid-to-cover: 2.70 (2.52).
    • Indirect bid: 70.0% (67.4%).
    • Direct bid: 19.5% (17.4%).
• Commodities:
  • WTI crude: +2.8% to $70.35/bbl
  • Gold: +1.4% to $2756.60/ozt
  • Copper: -0.2% to $4.26/lb
• Currencies:
  • EUR/USD: -0.3% to 1.0492
  • GBP/USD: -0.2% to 1.2745
  • USD/CNH: +0.4% to 7.2822
  • USD/JPY: +0.5% to 152.58
• The Day Ahead:
  • 8:30 ET: November PPI (Briefing.com consensus 0.3%; prior 0.2%), Core PPI (Briefing.com consensus 0.2%; prior 0.3%), weekly Initial Claims (Briefing.com consensus 220,000; prior 224,000), and Continuing Claims (prior 1.871 mln)
  • 10:30 ET: Weekly natural gas inventories (prior -30 bcf)
• Treasury Auctions:
  • 13:00 ET: $22 bln 30-yr Treasury bond reopening results