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Treasuries Pull Back Sharply As Consumer Price Growth Accelerates

Treasuries moved sharply lower over the course of the trading session on Wednesday as traders reacted to the latest consumer price inflation data.

Bond prices showed a steady move to the downside before closing firmly in negative territory. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, surged up by 12.8 basis points to 1.560 percent.

With the jump on the day, the ten-year yield rebounded after ending the previous session at its lowest closing level in well over a month.

The sharp pullback by treasuries came after the Labor Department released a report showing U.S. consumer prices increased by more than expected in the month of October, lifting the annual rate of price growth to its highest level in over thirty years.

The report said the consumer price index jumped by 0.9 percent in October after rising by 0.4 percent in September. Economists had expected consumer prices to climb by 0.6 percent.

Excluding higher prices for food and energy, core consumer prices still increased by 0.6 percent in October after inching up by 0.2 percent in September. Core prices were expected to rise by 0.4 percent.

Reflecting the bigger than expected monthly increase in prices, the Labor Department also said the annual rate of growth in consumer prices accelerated to 6.2 percent in October from 5.4 percent in September, reaching the highest level since November of 1990.

The annual rate of growth in core prices also accelerated to 4.6 percent from 4.0 percent, reflecting the biggest jump in prices since August of 1991.

The acceleration in the rate of consumer price inflation raised concerns about the outlook for interest rates even though the Federal Reserve has signaled it will not be in a hurry to begin raising rates.

"Strong demand and constrained supply will drive inflation higher in early 2022 which could lead the Fed to raise rates earlier than our December 2022 forecast," said Kathy Bostjancic, Chief U.S. Financial Economist at Oxford Economics.

She added, "If inflation continues to outstrip expectations, the Fed might also accelerate its QE tapering, but for now we foresee consistent tapering through mid-2022."

Bond prices saw continued weakness after the Treasury Department revealed this month's auction of $25 billion worth of thirty-year bonds attracted below average demand.

The thirty-year bond auction drew a high yield of 1.940 percent and a bid-to-cover ratio of 2.20, while the ten previous thirty-year bond auctions had an average bid-to-cover ratio of 2.32.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

Earlier this week, the Treasury revealed this month's auctions of three-year and ten-year notes also attracted below average demand.

Following the Veterans Day holiday on Thursday, trading on Friday may be impacted by reaction to the University of Michigan's preliminary report on consumer sentiment in the month of November.

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