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US Rates Rise As Bond Supply Increases And Inflation Becomes More Of A Concern

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Social Security Benefits; Source- Fox Business

Tuesday’s little increase in U.S. Treasury yields was caused by impending business and governmental bond issuance and investors’ nervous anticipation of this week’s important inflation data.

Rate Cuts By Federal Reserve

The market’s expectation at the bid deadline was lower than the yield of 4.105% achieved by the U.S. Treasury when it sold $52 billion worth of three-year notes on Tuesday, indicating that investors accepted the note without paying a premium.

$139 billion was offered for a 2.67 bid-to-cover ratio, a measure of demand that was marginally lower than the 2.69 average but slightly better than the 2.42 from the previous month.

“We’re in this price discovery phase right now, and it’s pretty choppy,” Wells Fargo’s macro strategist in New York, Angelo Manolatos, said. “However, the most important fact at this time is that policy rates are at their highest point. The Federal Reserve is getting closer to easing.”

When the U.S. consumer price index (CPI) for December is released on Thursday will provide more insight into the potential timing of rate cuts by the Federal Reserve. On Friday, U.S. producer prices will also be disclosed.

Decline In Inflation

The U.S. core CPI is predicted to be unchanged from November to the previous month at 0.3%, while the number is expected to rise at a slower annual rate of 3.8% from November onward.

According to TO LSEG’s rate probability tool IRPR, U.S. rate futures have priced in a more than 65% chance of a rate drop in March and roughly five rate cuts of 25 bps apiece for 2024, with inflation expected to be on the decline.


(PHOTO: ETF Database)

Michelle Bowman, the governor of the Federal Reserve, approved rate decreases late on Monday. Bowman renounced her steadfastly conservative viewpoint, stating that she now views US monetary policy as “sufficiently restrictive,” and she indicated that she would be open to eventually supporting interest rate reductions when inflation starts to decline.

In general, Wall Street dealers try to lock in borrowing prices when underwriting corporate bonds. During that procedure, a dealer locks in the borrowing cost on the bond issue by selling Treasuries as a hedge before the sale closes. The dealer purchases Treasuries after the bond is sold in order to break the “rate lock.”

According to analysts, there has been an abundance of corporate supply in European countries like Belgium, Spain, and Italy, which has also affected the U.S. Treasury market.

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