(Bloomberg) -- A fresh read on US consumer prices Wednesday stands to push already elevated US government bond yields even higher — beyond crucial 5% thresholds.
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Several months of sticky inflation along with a robust labor market have already threatened to keep the Federal Reserve from cutting interest rates further this year. That in turn has led to a bond market selloff, sending Treasury yields to levels not seen in about two years.
The benchmark 10-year yield has risen over a percentage point since the Fed began cutting rates in September. The central bank has reduced rates by one-full percentage point since then.
Long-dated bonds were little changed, with the 30-year yield hovering a few basis points below 5%. The threshold was breached on Tuesday even after a report showed wholesale prices rose less than economists estimated in December.
The 10-year rate fell two basis points to 4.77%, still near the highest since November 2023.
“The story really since September, that was turbocharged after the US presidential election, was the market pricing out an aggressive series of rate cuts through 2025,” said Brian Smedley, chief investment officer of the Cynosure Group’s hedge fund business. “Now that growth has continued to be resilient, the risk toward higher inflation has increased.”
Underlying US consumer inflation is forecast to show an increase of 3.3% from a year earlier in December — matching readings from the prior three months.
“If you were to see substantial inflation surprises over the coming months, for this month and subsequent months, the market would move to price out that additional [Fed rate] cut,” said Roger Hallam, global head of rates at Vanguard.
Swaps traders are pricing that the US central bank will push through just one more quarter-point cut this year, in around September.
Of course, a softer inflation figure Wednesday, “with rent measures going well below expectations would certainly take the sting out of the recent rise in yields,” said Hallam.
But so far that remains to be seen. “We are faced with a very different macro backdrop than from a number of months ago,” Hallam said.
With President-elect Donald Trump about to take office, “there’s concern around the inflationary impact of tariffs and around the inflationary impact of reduced migration flows,” he added.
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