U.S. government-debt yields finished mostly higher on Friday after December inflation data reinforced the possibility of a soft landing for the economy.
What happened
- The yield on the 2-year Treasury BX:TMUBMUSD02Y rose 5.3 basis points to 4.365%, from 4.312% on Thursday. For the week, it fell 4.1 basis points. Yields move in the opposite direction to prices.
- The yield on the 10-year Treasury BX:TMUBMUSD10Y advanced 2.8 basis points to 4.159%, from 4.131% on Thursday. It rose 1.4 basis points this week.
- The yield on the 30-year Treasury BX:TMUBMUSD30Y rose less than 1 basis point to 4.388%, from 4.380% on Thursday. For the week, it rose 3.5 basis points.
- Ten- and 30-year rates both ended higher for a second straight week, according to Dow Jones Market Data, while also finishing at their second-highest levels of the year so far.
What drove markets
The PCE price index, the Federal Reserve’s preferred inflation measure, rose a mild 0.2% in December. The core rate, which excludes food and energy, advanced by the same magnitude — in line with the expectations of economists polled by the Wall Street Journal.
Meanwhile, the annual rate of core inflation eased to 2.9% from 3.2%, marking the lowest level in almost three years and suggesting that the disinflation trend is continuing.
Interest-rate expectations were little changed after the inflation report. Fed-funds futures traders saw a 97.4% chance of no action by the Federal Reserve at its meeting next week, which would leave the main policy-rate target between 5.25%-5.5%, according to the CME FedWatch Tool. The chance of no action again by March was seen at 52.6%. Traders mostly expect five or six quarter-point rate cuts by December.
Other data released on Friday showed that pending home sales in December posted their biggest jump since June 2020. With Friday’s data now out of the way, traders have turned their attention to Monday’s release of financing estimates by the Treasury.
See: Wall Street is counting on Treasury’s borrowing needs to trend lower between now and June
What strategists are saying
“For a market that was looking for a ‘high’ +0.1%, the realized figures were very much in line,” said BMO Capital Markets strategist Ben Jeffery, referring to Friday’s PCE report for December.
“We don’t expect December’s data will materially shift March cut odds ahead of the weekend, and instead we’ll look for next week’s supply announcements, FOMC [Federal Open Market Committee] decision, and payrolls print to quickly take the market’s focus as the PCE print is digested,” he wrote in an email.
