US The CPI rose more than expected and raised the initial yields as a first reaction. The 2-year yield jumped 8 basis points following the data and stabilized just above 5.05%, still a bit below where it ended just after last week’s stronger payrolls report.
The long side was slow to react, but as oil prices finally signaled some easing of concerns over further escalation of the situation in the Middle East, investors also began to unload the long side. The initial bearish flattening turned into a fierce bearish flattening later in the day. A series of soft Treasury auctions were capped by a very weak 30-year auction and dealt the final blow to the long segment. From the low at the start of the European session to the high after the auction, there was a rise of more than 21 bps for the 30-year bond yield, pushing it above 4.85% to finish 17 bps higher on the day . It is the highest jump since March 2020, when liquidity dried up due to the coronavirus turmoil.
There is also another important distinction between the drivers in the front and those in the rear. The initial rates caused the inflation component to increase by 8 basis points, that is, the real rate changed little. The final part, however, was driven almost entirely by the current real rate component, highlighting the higher premium investors are demanding in light of higher issuance and deficit prospects, rather than being a story of simply macro resilience.
Yesterday we still heard Federal Reserve officials, like Susan Collins, push the idea that higher yields can reduce the need to raise rates. While that may limit the front end (which briefly re-priced in a 50% chance of another Fed rate hike), the long end is driven by different factors.