Bonds rose and yields fell after an in-line inflation reading prompted investors to increase their bets on a Fed rate cut next month.
On Wednesday, the Bureau of Labor Statistics reported that U.S. consumer prices rose 0.2% from September to October, as expected.
Core consumer prices, excluding food and energy, also rose by 0.3% as expected.
The news was welcome for bond bulls reeling from a string of bad days in the wake of Trump’s election victory. Economists widely expect that Trump’s policies could lead to stronger growth, inflation and deficits, all of which tend to weigh on bond prices.
But at least today, bonds are getting a breather from that selling. Following the release of the CPI data – which also showed headline inflation and core inflation rising 2.6% and 3.3% annually respectively – the likelihood of a Fed rate cut in December increased.
The pricing of Fed funds futures suggests there is a 79% chance that the US central bank will cut rates by 25 basis points on December 18, compared to 60% before the CPI data release.
Bonds and the exchange-traded funds that house them rose Wednesday — at least initially. The iShares 7-10 year government bond ETF (IEF) gained as much as 0.46%, while the iShares 20+ Year Government Bond ETF (TLT) rose by no less than 0.97%.
However, at the time of writing, the funds gave up much of these gains as traders used the rally as an opportunity to sell.
While today’s inflation data may have increased the chances of a Fed rate cut in December, the market is still pricing in far fewer rate cuts today than it was a few months ago.
Current prices for Fed funds futures indicate that there may be only two more Fed rate cuts next year, after the one in December.
Without the support of Fed rate cuts, bonds may focus on the Trump effect, which is largely seen as negative for bonds.
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