Despite the Looming CPI Inflation Report, Treasury Yields Edge Up

Yields on U.S. Treasury bonds edged higher on Tuesday morning as investors awaited the release of November's consumer-price index (CPI), a key measure of inflation, ahead of the Federal Reserve's final monetary policy meeting for 2024. The modest rise in yields reflected a cautious market atmosphere as traders prepared for critical economic data.

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Market Movements

The yield on the 2-year Treasury increased slightly, climbing by 1.2 basis points to 4.138% from 4.126% on Monday.

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The 10-year Treasury yield rose 2.4 basis points, reaching 4.222% from the prior session's 4.198%.

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Similarly, the 30-year Treasury yield gained 2.2 basis points, advancing to 4.411% from 4.389% on Monday.

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Investor Sentiment and Expectations

Tuesday's trading in U.S. government debt remained subdued as market participants focused on Wednesday's CPI release. This report is widely seen as a pivotal indicator for gauging the Federal Reserve's upcoming policy decisions.

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Economists survey anticipate that the annual headline inflation rate will tick up to 2.7% in November, slightly higher than October's 2.6%. Monthly CPI is projected to increase to 0.3%, compared to 0.2% in the prior month.

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For core CPI, which excludes volatile food and energy prices, expectations suggest an unchanged monthly growth rate of 0.3% and an annual rate holding steady at 3.3%.

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Richard Moody, chief economist at Regions Financial in Alabama, highlighted the importance of this week's inflation reports. "The November CPI report on Wednesday, along with Thursday's producer-price index, will be the final inflation data points the Federal Open Market Committee (FOMC) reviews before their policy announcement next week," Moody noted.

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While Moody acknowledged that inflation remains above the Federal Reserve's 2% target, he pointed out that core inflation trends have not been moving in the desired direction. Despite this, Moody said it is unlikely to prevent a 25-basis-point rate cut at next week's meeting. However, he cautioned that persistent inflationary pressures could lead to fewer rate cuts in 2025, with a slower pace than many market participants had initially expected.

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Federal Reserve Outlook

As of Tuesday, traders in fed-funds futures assigned an 86.1% probability to the Federal Reserve reducing its benchmark interest rate by 25 basis points at its December 18 meeting. This would bring the target range down from the current 4.50%-4.75% to 4.25%-4.50%.

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Looking ahead, markets anticipate that the central bank could lower the fed-funds rate further, potentially ending 2025 with a range of 3.75%-4%, or even lower. These expectations reflect the belief that the Fed will aim to balance its inflation-fighting mandate with concerns about economic growth.

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In addition to the CPI data, investors are awaiting the results of the Treasury's $58 billion auction of 3-year notes, which is scheduled to conclude at 1 p.m. Eastern time on Tuesday. Treasury auctions often provide insight into investor appetite for government debt, which can, in turn, influence yield movements across maturities.

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The upcoming CPI report will be a critical determinant for the Federal Reserve’s policy direction. If inflation readings exceed expectations, it could alter the Fed’s outlook, potentially leading to a more cautious approach to rate cuts in 2025. Conversely, a softer-than-expected inflation report might reinforce market confidence in the Fed’s plans to gradually ease monetary policy.

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Investors will also keep a close watch on Thursday's producer-price index, another measure of inflationary pressures, to assess whether cost increases at the production level are feeding into broader price trends.

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For now, bond markets remain focused on the dual challenges of elevated inflation and the Federal Reserve’s efforts to engineer a soft economic landing. As these dynamics unfold, Treasury yields and interest rate expectations are likely to remain highly sensitive to incoming data.

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This week's developments will not only influence the Fed's immediate actions but could also shape broader market trends in the coming months, as investors assess the interplay between inflation, monetary policy, and economic growth.

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