U.S. Inflation Data to Test Treasury Rally as Markets Price in Over 80% Odds of December Rate Hike

Bond traders are awaiting Tuesday’s key inflation report for clues about the Federal Reserve’s policy path and whether the recent rally in U.S. Treasuries can continue. According to Sina Finance, Treasury yields across maturities fell last week to their lowest levels since September after Democrats swept the midterm elections, technology stocks sold off, and investors moved into safe-haven assets. The 10-year Treasury yield edged up to 4.88% on Monday as stocks showed signs of stabilizing, but remained well below the level above 5% reached last month; it was little changed during Asian trading on Tuesday. Economists expect the latest U.S. consumer price data to show inflation slowing but remaining elevated, keeping pressure on the Fed to raise rates at its next meeting in December. A survey of economists put October consumer prices up 0.3% month over month, below September’s 0.6% increase, the fastest in five months. The Tuesday report will not include a year-over-year comparison because a government shutdown prevented the release of last year’s October CPI data. The report is the last CPI release before the Fed’s December policy meeting. Interest-rate swaps indicate more than an 80% probability of a 25-basis-point rate increase in December and price in about two increases cumulatively by next summer; last month, contracts fully priced in three increases by then.