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The Bond Market Awaits the Latest CPI Report Tuesday

The US 10-year Treasury yield has risen recently, likely signaling some concerns that inflation may be more difficult to contain than the market had anticipated.

It returned 3.74% on Friday versus 3.4% in early February. Bond yields and prices move inversely.

However, keep in mind that the yield has fallen from about 3.9% earlier this year to 4.23% at the end of October.

Mike Cudzil, senior bond portfolio manager at Pimco, warns against “trying to translate moves of 15 basis points into a narrative”.

A basis point is one hundredth of a percentage point.

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Cudzil believes inflation is moving in the right direction.

He points out that the 10-year annualized inflation breakeven rate was recently around 2.35%, based on Treasury Inflation-Protected Securities, or TIPS.

What about the recent rise in 10-year Treasury yields?

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“The market is trying to assign maybe a slightly higher probability of inflation lasting a little longer,” he says — or possibly “of inflation ending a little higher than markets thought.”

But Cudzil expects the central consumer price index (CPI) to end this year below 3%. In December, it rose at an annualized rate of 5.7%, well below the 9.1% rise in mid-2022.

Still, the Feb. 3 report showing non-farm payrolls rose by an unexpected 517,000 in January surprised many in the market.

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It has raised some concerns about how long higher levels of inflation might last — and about how long and by how much the Federal Reserve will need to keep raising rates.

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Torsten Slok, chief economist at Apollo Global Management, noted in an email on Friday that “inflation remains a problem” and that “evidence is mounting that inflation will indeed remain more persistent.”

He gave 10 reasons, including his expectation of the housing market bottoming out, a strong labor market and China’s reopening – particularly their impact on commodity prices.

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Marvin Loh, senior global macro strategist at State Street, senses sentiment towards the Fed and inflation has shifted yet again.

Earlier this year, he says, there was a perception in the market that the Fed shouldn’t be so aggressive in raising rates. And if it got more aggressive, it could then “cut rates quite aggressively because inflation would subside,” says Loh.

He expects the Fed to hike short-term rates at least twice more, most likely in 25 basis point increments.

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“There was a perception at some point that we would come by March and be done with rate hikes,” adds Loh.

No longer.

The bond market will no doubt be paying close attention to January’s CPI when it is released on Tuesday.

Write to Lawrence C. Strauss at [email protected]

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