By Mark DeCambre, MarketWatch , Sunny Oh
Stronger-than-expected January inflation data weighs on Treasury prices
Treasury prices slumped, pushing up yields, on Wednesday after a stronger-than-expected reading on consumer inflation underlined investor fears that the Federal Reserve could move more aggressively than expected to tighten monetary policy.
How are Treasurys performing?
The 10-year Treasury note yield climbed 7.6 basis points to 2.913%, according to WSJ Market Data Group. The yield briefly topped 2.90% for the first time since January 2014
The two-year note yield , the most sensitive to shifting expectations for Fed policy, jumped by 6.8 basis points to 2.172%, the largest one-day yield rise since March 2017.
The yield for the 30-year bond was up 5.2 basis points to 3.176%, its highest since March 2017.
Bond prices move inversely to yields.
What's driving the market?
The consumer-price index in January rose 0.5%, above the 0.4% forecast by economists polled by MarketWatch. The core gauge, which strips out volatile food and energy prices, rose 0.3%, higher than the 0.2% expected.
See: CPI surges 0.5% in January, but yearly rate of inflation unchanged (http://www.marketwatch.com/story/cpi-surges-05-in-january-but-yearly-rate-of-inflation-unchanged-2018-02-14)
Traders, and the broader market, have homed in on inflation data after the jobs report for January signaled that inflation, which has bedeviled economists and investors for its absence during a healthy labor-market cycle, could be due to re-emerge. Average hourly wages for private-sector workers in January rose 2.9% (http://www.marketwatch.com/story/us-adds-200000-jobs-worker-pay-rises-at-fastest-pace-since-2009-2018-02-02) from a year earlier, marking the largest such increase since June 2009.
Inflation is a key economic measure in bond investing because rising inflation can erode the value of a bond's fixed payments. Indications that inflation would remain subdued have kept yields in check until this year.
Wall Street is pricing in about three rate increases in 2018, but expectations could jump to an additional one or two hikes if inflation is seen as surging more rapidly than anticipated. A faster pace of rate increases could push up short-term yields and keep long-term yields subdued, flattening the so-called yield curve. Traders on the Fed fund futures market raised the chance of four rate increases to 19.4% from 12% a month ago, data from CME Group shows.
Read: CPI has market locking in March rate increase and moving toward 4 Fed increases this year (http://www.marketwatch.com/story/cpi-has-market-locking-in-march-rate-hike-and-moving-toward-4-fed-hikes-this-year-2018-02-14)
What did market participants say?
"Expectations were somewhat high going into this, we still beat that number. Investors were looking for hard results that inflationary pressures had arrived and this is it, and now you see the market reacting accordingly. We've broken above the 2.85% on the 10-year yield. Our view is if we continue to see hard evidence of inflationary data, a 3.0% is probably in the cards and something we'll see in a short period of time," said Charlie Ripley, senior investment strategist at Allianz Investment Management.
"The Fed is now very likely to follow through on its plan to raise rates again in March. The recent market selloff will have already played into their hands as the value of assets didn't really reflect the Fed's tightening over the last year. If the selloff gathers real momentum then they will need to think about their plans again, but we're a long way from there," said Luke Bartholomew, investment strategist at Aberdeen Standard Investments.
What else is in focus?
Worries about rising budget deficits, amid a wave of fiscal-stimulus measures backed by President Donald Trump, are expected to drive up the government's borrowing costs, which would likely result in investors demanding extra yield to compensate for the risk of holding Treasurys.
Analysts at Credit Suisse estimated after the recent spending bill that debt-servicing costs will eventually exceed 5% of GDP. Increased issuance also comes as the Fed continues to wind down its balance sheet, depriving the market of one source of price-insensitive demand.
Cleveland Fed President Loretta Mester said yesterday the recent market turmoil wouldn't derail the Fed from its current hiking trajectory. The White House is reportedly (http://www.marketwatch.com/story/white-house-considering-mester-to-be-fed-vice-chair-wsj-2018-02-13) thinking of nominating Mester as a vice chairwoman of the Federal Reserve.
Read: Fed's Mester: Economy will 'work through this episode of market turbulence' (http://www.marketwatch.com/story/feds-mester-economy-will-work-through-this-episode-of-market-turbulence-2018-02-13)
Retail sales fell by 0.3% in January (http://www.marketwatch.com/story/us-retail-sales-slump-in-january---and-december-doesnt-look-so-good-now-either-2018-02-14), the largest drop in a year. Economists polled by MarketWatch had forecast a 0.2% increase in sales.
What other assets are in focus
Signs of rising wages from the January jobs report were blamed for sparking the selloff in global equities, with the Dow Jones Industrial Average , S&P 500 index and the Nasdaq Composite Index slipping into correction territory last week, typically defined as a drop of at least 10% from a recent peak.
Anxieties spurred by rising borrowing costs as yields pitched higher were among the factors that helped push stocks lower, market participants have said.
Also check out: S&P 500 could slump to 2,500 if the 10-year Treasury yield crosses 3.0% (http://www.marketwatch.com/story/sp-500-could-fall-below-2500-if-the-10-year-treasury-yield-crosses-30-2018-02-13)
Meanwhile, yields for the 10-year German bond , known as the bund, were up by 1.5 basis points to 0.758%.
(END) Dow Jones Newswires
February 14, 2018 16:33 ET (21:33 GMT)
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