Yields in the world’s biggest bond market spiraled downward as traders slashed their outlook for just how high the Federal Reserve will need to hoist its policy rate after consumer-price pressures slowed more than estimated last month.
Swaps traders downgraded the odds of another three-quarter-point rate increase in December almost to nil, while continuing to price in a half-point hike. On the prospect of a slower tightening trajectory the five-year yield tumbled as much as 31 basis points, putting it on track for its biggest one-day drop since 2009. The benchmark 10-year yield fell as much as 27 basis points to 3.82%. US stocks soared and the Bloomberg dollar index plunged.
The so-called terminal rate, or the expected peak for the Fed’s policy rate, was cut to under 4.9%, sometime around May. Before the latest CPI readings the peak rate in swaps referencing the central bank’s policy meetings was around 5.09%.
“Markets are reacting aggressively to the CPI release,” said Gregory Faranello, head of US rates trading and strategy at AmeriVet Securities. “After a year like we’ve had, people are very anxious for some good news.”
The convexity of bonds (their sensitivity to interest rates) declines the higher yields move. The reason yields surged earlier this year was because prices were high, yields were low and the market was especially sensitive to interest rates hikes. The higher yields go, the more attractive they become. Obviously 4% is more attractive than 0.5% and compounds at a much more impressive rate.Click HERE to subscribe to Fuller Treacy Money Back to top