Treasury Yields Slide Again After PPI

Even if it’s a bit early to claim victory against inflation, the third straight month of declining wholesale prices (PPI) in the U.S. should be a positive signal for the Federal Reserve. The producer price index fell 0.1% at the year-end from a month earlier. With less inflation in the wholesale pipeline, market participants are factoring in the likelihood of the Federal Reserve further loosening its monetary policy this year, after the most aggressive rate hiking cycle in 40 years (+525 basis points over 17 months), as recalled below:

The Fed Fund futures suggest rate cuts of 150 basis points by the end of 2024, with the first move occurring at the May FOMC meeting.

PPI inflation data also sent Treasury yields lower as bets on rate cuts intensified. The 10-year U.S. Treasury yield was down 11 basis points, from 4.05% to 3.94% while the 2-year U.S. Treasury yield plunged 26 basis points, from 4.40% to 4.14%, thereby reducing the inversion of the yield curve.

In Europe, one could observe the opposite trend. The 10-year Bund yield gained 2 basis points from 2.16% to 2.18%. Inflation in the eurozone rose to 2.9% in December, reversing six months of consecutive falls, creating doubt as to when the ECB would move lower.