Treasuries Fall After CPI, Yellen Comments; 30-Year Tests 3%

  • December core CPI increase spurs selling; TIPS outperform
  • 10-year yield rebounds from close below 50-day moving average

El-Erian: Yellen More Dovish Than I Expected

Treasuries declined, reaching session lows in late trading after Fed’s Yellen said “I and most of my colleagues” expected to raise rates “a few times a year” through the end of 2019. Yields rose from the lowest closing levels this year, with about a third of the 11 basis point increase in 5-year yields coming after Yellen’s comments were released at 3pm ET.

Earlier declines were based on the December Consumer Price Index, as ex-food and energy prices rose slightly more than forecast, and supply-induced weakness in some EGB markets. Yields across the curve were higher by 6-11 basis points at 3:45 p.m. in New York, with the 10-year rising 9.3 basis points to 2.371 percent.

  • While forecasts of FOMC members released on Dec. 14 indicated a median expectation of 3 rate increases this year, forecasts are anonymous and Yellen is viewed as skewing dovish
  • December CPI excluding food and energy rose 0.2%, in line with median estimates in a Bloomberg survey, though the unrounded increase was 0.23%, up from 0.15% in November.
  • The CPI data sparked a rally in TIPS breakevens that pushed 5Y and 10Y rates to multi-month highs, even as dealers prepared to underwrite $13b 10Y TIPS new issue Thursday; 5Y and 10Y breakevens touched highest levels since 2014 before retreating as oil fell
  • Post-CPI flows included real-money selling of intermediates and selling of 10Y call options with nearby strike; flows also included 2 block sales in Ultra 10Y futures
  • Yields extended their climb led by 30Y as long end of Italian curve sold off on pricing of EU6b 15Y BTP, while Spanish and French markets sagged ahead of tomorrow’s auctions; the move came after Tuesday’s 10Y UST yield closed at 2.325%, the first below the 50-DMA since September.
  • UST 5s30s curve topped 111.5bp for first time since Jan. 5, peaking between launch and pricing of World Bank $5b 5Y offering; it collapsed to under 108bp as 5Y sector led yields higher after Yellen speech
  • Yellen was silent on the prospect of changes to the Fed’s balance balance sheet; earlier Wednesday, Dallas Fed’s Kaplan became the latest Fed official (following San Francisco Fed’s Williams and Gov. Brainard Tuesday and three regional presidents last week) to discuss potential for Fed to begin to shrink its balance sheet

— With assistance by Edward Bolingbroke, and Brian Chappatta

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