Yields rise on supply, inflation data boosts Fed rate cut expectations

US Treasury yields rose on Wednesday as the Treasury Department sold long-dated supply and data showed a widening US budget deficit.

That overturned an earlier drop in yields after consumer price inflation data for November reinforced bets the Federal Reserve will cut rates by 25 basis points next week.

Longer-term debt concerns were seen weighing on the market after the US government posted a USD 367 billion budget deficit for November, up 17% from a year earlier.

“Not only does today’s report from the Treasury confirm that we’ve borrowed USD 624 billion so far this fiscal year – USD 10 billion per day – but on a rolling basis, we’ve borrowed USD 2.1 trillion in the last twelve months. That’s an astonishing sum especially when considering the huge challenges ahead,” the Committee for a Responsible Federal Budget said in a release.

The Treasury Department earlier saw good demand for a USD 39 billion sale of 10-year notes, the second sale of USD 119 billion in coupon-bearing sales this week.

The debt sold at a high yield of 4.235%, more than a basis point below where they had traded before the sale. Demand was 2.70 times the amount of debt on offer, the highest bid-to-cover ratio since at least March 2022.

The US government saw solid demand for a USD 58 auction of three-year notes on Tuesday and will also sell USD 22 billion in 30-year bonds on Thursday.

Benchmark 10-year note yields were last up 5 basis points on the day at 4.271%.

Interest rate sensitive two-year note yields rose 1 basis point to 4.159%.

The yield curve between two-year and 10-year notes steepened by around three basis points to 11.3 basis points.

Yields fell earlier after data showed that both headline and core consumer inflation rose by 0.3% in November, in line with economists’ expectations, keeping the Fed on track for another interest rate cut.

“It was largely as expected. I don’t think it will change the Fed’s thinking, so I expect them still to cut rates next week,” said Eric Winograd, director of developed market economic research at AllianceBernstein in New York.

The consumer price index posted the largest gain since April after advancing 0.2% for four straight months. In the 12 months through November, the CPI climbed 2.7% after increasing 2.6% in October.

Excluding the volatile food and energy components, the CPI rose by the same margin for the fourth consecutive month. In the 12 months through November, the so-called core CPI gained 3.3%, following a similar advance in October.

“With the payrolls report behind us and now the inflation report behind us, there’s nothing stopping the Fed from cutting 25 bps next week,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

Traders are pricing in a 95% probability of a 25 basis point cut at the conclusion of the Fed’s Dec. 17-18 meeting, up from 86% before the data, according to the CME Group’s FedWatch Tool.

A positive sign in the data was that shelter inflation continued to slow, but services and shelter inflation are still higher than the Fed would like, said Winograd.

“As a result of that, I expect them to signal next week some caution and cut rates, but to indicate that they’re not locked into cutting rates every meeting, that they’re going to have to continue to watch the data and that they will eventually need to see additional downward momentum in inflation,” he said.

Traders see the Fed as likely to pause rate cuts in January. The trajectory of rates then may depend on how quickly policies by the new Trump administration are introduced, and when they begin to be seen in the economic data.

(Reporting By Karen Brettell; Additional reporting by Chuck Mikolajczak; Editing by Christina Fincher, Bernadette Baum, and Deepa Babington)