Red Hot CPI Sends Rates Surging

Swap rates and Treasury yields jump higher as breakeven inflation rates hit YTD highs. Today’s red hot CPI print sent swap rates and Treasury yields sharply higher across the curve as investors re-assessed inflation risk. Breakeven inflation rates, a market derived measure of inflation, hit YTD highs- 5-year breakevens hitting 3.09% while 10-year breakevens crested 2.70%. No longer a topic limited to financial circles, inflation has become a full-blown political issue as well- President Biden saying today that “everything from a gallon of gas to a loaf of bread costs more.” Whether or not political pressure has any impact on Fed policy remains to be seen, but swap rates and Treasury yields would close the day 10-12 bps higher across the curve- the 10-year Treasury yield climbing 11 bps to close at 1.55%.

October U.S. consumer prices exceed all forecasts, rise most since 1990. The headline consumer price index (CPI) increased 6.2% year-over-year while rising 0.9% from September. Energy, shelter, and vehicle costs were the primary drivers during the month, with inflationary pressures broadening as core inflation, excluding energy and food prices, increased to a 30-year high to 4.6% from the prior year. Shelter costs comprise one-third of the CPI and are now up 3.5% over the past year.

Weak demand for U.S. Treasury 30-year bond auction sends long-term rates higher. In a risk-off move, investors did not show much appetite for today’s 30-year bond auction. The poor auction sent the 30-year yield 14 bps higher to 1.96% before closing the day at 1.90%. The when-issued yield was 1.888% for the $25 billion in 30-year Treasury, but awarded at the much higher rate of 1.94%.