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Bond Report: 2-year Treasury yield has biggest drop in over a month as traders see chance U.S. inflation may start to slip

Most Treasury yields trended sharply lower on Tuesday as investors focused on details of March’s consumer price index report that suggest U.S. inflation may have already peaked.

Meanwhile, Treasury’s $34 billion 10-year note reopening produced the “widest tail since 2009” and “poor results,” according to Jefferies economists Thomas Simons and Aneta Markowska.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.724%

traded at 2.72%, down from 2.779% at 3 p.m. Eastern Monday. Monday’s level was its highest since Jan. 18, 2019, according to Dow Jones Market Data.

The 2-year Treasury note yield
TMUBMUSD02Y,
2.393%

was 2.381% versus 2.506% Monday afternoon.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.827%

was 2.826% versus 2.82% late Monday, which was its highest since May 21, 2019.

What’s driving the market?

The rate of U.S. inflation in the past year moved up to 8.5% in March from 7.9%, topping 8% for the first time in more than four decades as higher gasoline prices slammed consumers, according to a government report Tuesday.

On a monthly basis, the consumer price index jumped 1.2%, driven by the higher cost of gasoline, food and housing. It was the largest monthly gain since Hurricane Katrina in 2005, and exceeded Wall Street’s forecast of a 1.1% advance.

One potential sign inflation might be peaking, however, was the smallest increase in six months in the so-called core rate of inflation that strips out food and energy. It rose just 0.3% last month. The core rate climbed over the past year, however, to 6.5%.

Read: Torrid inflation, now at 8.5%, ignites further debate in markets over where U.S. goes from here

In remarks made on Tuesday, Federal Reserve Gov. Lael Brainard indicated that she welcomes the moderation in March’s core gauge. Last week, Brainard called for an rapid wind down of the Fed’s balance sheet which contributed to a jump in yields, particularly for longer dated maturities and rattled stock-market investors.

Earlier on Tuesday, the National Federation of Independent Business said its Small Business Optimism Index decreased to 93.2 in March from 95.7 in February, registering the third decline in as many months and falling to the lowest level since April 2020. Economists polled by the Wall Street Journal had expected the index to fall slightly to 95.3.

What do analysts say?

“Today’s report left our 2022 inflation outlook little changed – we see core CPI ending 2022 around 4.5% to 4.7% y/y before an eventual easing of goods inflation, tighter monetary policy, and slower demand brings core CPI down to 2.5% to 2.7% in late 2023,” said Allison Boxer, an economist at PIMCO.

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