Bond Market Update

Treasuries Overcome Hot September CPI

• U.S. Treasuries had a volatile, but ultimately quite impressive, showing on Wednesday, staging a strong recovery from post-CPI selling that produced fresh 2026 highs in yields on 3s, 5s, and 7s. The trading day started with modest gains across the curve, but the gains faded in a flash once the market received the September CPI report, which showed an acceleration in year-over-year rates for headline CPI (to 3.7% from 3.4%) and core CPI (to 2.6% from 2.4%). This revelation was followed by swift selling that significantly boosted expectations for an October rate hike, but Treasuries fought their way back as the day went on. The market reached session lows around 9:00 ET, climbing steadily through the remainder of the day. The long bond was at the forefront of the bounce, turning positive in the early afternoon while shorter tenors followed suit. The 2-yr note failed to make it back into the green, but its yield still fell 15 basis points from today's morning high, making for a strong recovery from a poor start. Thanks to the recovery, the implied likelihood of an October rate hike was only a little bit above levels from Tuesday. Crude oil climbed above $95/bbl while the U.S. Dollar Index rose 0.4% to 102.56.
• Yield Check:
  • 2-yr: +1 bp to 4.80%
  • 3-yr: -1 bp to 4.91%
  • 5-yr: -2 bps to 4.99%
  • 10-yr: -3 bps to 5.19%
  • 30-yr: -4 bps to 5.53%

• News:
  • The Monetary Authority of Singapore made no changes to its policy stance against expectations for tightening.
  • South Korea may reduce its debt issuance by up to KRW10 trln.
  • European Central Bank President Lagarde repeated that second-round effects of inflation are not being seen.
  • European Central Bank policymaker Wunsch said that the ECB will probably have to implement another rate hike.
  • Germany's Economic Ministry noted that the momentum in the German economy likely slowed in Q3.
  • China's September CPI 0.2% m/m (expected 0.3%; prior 0.4%) and 0.9% yr/yr (expected 1.0%; prior 0.8%); PPI 5.0% yr/yr (expected 4.4%; prior 3.8%). September Trade Balance $133.53 bln (expected $116.80 bln; prior $119.09 bln); Exports 36.3% yr/yr (expected 25.5%; prior 25.0%) and Imports 31.0% yr/yr (expected 24.5%; prior 28.2%). September New Loans CNY1.080 trln (expected CNY1.025 trln; prior CNY60.0 bln); Total Social Financing CNY3.550 trln (expected CNY3.270 trln; prior CNY1.660 trln); M2 Money Supply 7.2% yr/yr (expected 7.4%; prior 7.5%) and Outstanding Loan Growth 4.8% yr/yr (expected 4.8%; prior 4.9%).
  • India's September WPI Inflation 11.39% yr/yr (expected 10.18%; prior 9.92%); Manufacturing Inflation 9.76% (prior 8.37%), Food Inflation 8.14% (prior 5.67%), and Fuel Inflation 25.85% (prior 22.93%).
  • Germany's September WPI 1.9% m/m (expected 0.6%; prior 0.9%) and 8.7% yr/yr (prior 6.8%).
  • Spain's September CPI 0.3% m/m (expected 0.3%; prior 0.7%) and 4.9% yr/yr (expected 4.9%; prior 4.3%); Core CPI 3.1% yr/yr (expected 3.1%; prior 2.9%); HICP 0.6% m/m (expected 0.6%; prior 0.7%) and 5.0% yr/yr (expected 5.0%; prior 4.6%).
• Today's Data:
  • Total CPI increased 0.6% month-over-month (Briefing.com consensus: 0.6%), led by a 5.2% jump in the energy index, following a 0.4% increase in August. The September increase left total CPI up 3.7% year-over-year versus 3.4% in August. Core CPI, which excludes food and energy, increased 0.3% month-over-month (Briefing.com consensus: 0.2%), pushed by a 0.4% increase in the shelter index, following a 0.3% increase in August. That left core CPI up 2.6% year-over-year versus 2.4% in August.
    • The key takeaway from the report is the acceleration in inflation away from the Fed's 2.0% inflation target. That is going to accelerate concerns about a possible tightening of Fed policy at the October FOMC meeting, not to mention deficit worries as cost-of-living adjustments for 2027 for SSI recipients are on track to see their largest increase in three years.
  • The Fed's Beige Book for October noted that economic activity in seven Districts was essentially muted while just two Districts reported moderate growth. The Dallas District observed robust manufacturing growth while six other Districts saw modest to moderate manufacturing growth. Consumer spending was little changed in general while employment levels were also steady. Three Districts reported robust growth in prices while eight observed moderate growth.
  • The weekly MBA Mortgage Index fell 2.7% to follow last week's 4.2% decrease. The Purchase Index was down 4.0% while the Refinance Index was up 0.5%.
• Commodities:
  • WTI crude: +1.1% to $95.11/bbl
  • Gold: -1.6% to $4108.00/ozt
  • Copper: -1.0% to $6.66/lb
• Currencies:
  • EUR/USD: -0.4% to 1.1154
  • GBP/USD: -0.5% to 1.3188
  • USD/CNH: +0.1% to 6.6953
  • USD/JPY: -0.1% to 158.21
• The Day Ahead:
  • 8:30 ET: September PPI (Briefing.com consensus 0.5%; prior 0.4%), Core PPI (Briefing.com consensus 0.3%; prior 0.2%), September Retail Sales (Briefing.com consensus 0.3%; prior 1.2%), Retail Sales ex-auto (Briefing.com consensus 0.3%; prior 1.4%), weekly Initial Claims (Briefing.com consensus 200,000; prior 197,000), Continuing Claims (prior 1.716 mln), October Empire State Manufacturing (Briefing.com consensus 7.0; prior 7.6), and October Philadelphia Fed (Briefing.com consensus 29.0; prior 37.8)
  • 10:00 ET: August Business Inventories (Briefing.com consensus 0.4%; prior 0.8%)
  • 10:30 ET: Weekly natural gas inventories (prior +85 bcf)
  • 12:00 ET: Weekly crude oil inventories (prior -3.186 mln)