Treasury Yields Continue to Rise on the 'Last Mile’ Amidst Inflation Fear

Yields on U.S. government bonds were relatively steady to slightly higher on Thursday morning as investors digested economic data showing higher-than-expected producer prices for November, alongside a notable rise in weekly jobless claims to their highest level since mid-October.

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The yield on the 2-year Treasury remained nearly unchanged at 4.157%, compared to 4.156% on Wednesday. Bond yields and prices move inversely to one another.

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The 10-year Treasury yield increased slightly, up 1.6 basis points to 4.286% from 4.270% the previous day.

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Meanwhile, the yield on the 30-year Treasury rose 3.3 basis points to 4.511%, up from 4.478% on Wednesday.

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Market Drivers

Economic data released Thursday revealed that the producer-price index (PPI) for November increased by 0.4%, surpassing economists’ expectations of a 0.2% rise, as per a Wall Street Journal survey. However, the core PPI reading, which excludes volatile food and energy prices, showed a more muted performance.

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This data follows Wednesday's report on the consumer-price index (CPI) for November, which indicated that the annual headline inflation rate edged up to 2.7% from 2.6% in the previous month.

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Analysts at Bank of America, led by rates strategist Mark Capleton, highlighted concerns about inflationary pressures persisting as the economy transitions through the "last mile" of disinflation. They pointed out that while core goods inflation has returned to pre-pandemic levels, this improvement has been bolstered by a strong U.S. dollar and weaker energy prices, which have helped reduce production costs.

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In another economic report released Thursday, initial jobless claims rose by 17,000 to reach 242,000 for the week ending December 7. This marked a two-month high and pointed to increased volatility in the labor market. Jobless claims often experience significant fluctuations around the holiday season due to seasonal adjustments.

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The uptick in claims adds another layer of complexity for policymakers and market participants trying to gauge the resilience of the labor market and its implications for the broader economy.

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The hotter-than-expected PPI data and rising jobless claims offer mixed signals for investors. While the PPI suggests lingering inflationary pressures, the increase in jobless claims may indicate potential softening in the labor market. These data points are likely to weigh heavily on the Federal Reserve's upcoming monetary policy decisions, as the central bank balances its efforts to combat inflation with the need to avoid excessive economic cooling.

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Market participants will now turn their attention to additional economic data releases and Federal Reserve commentary for further clues on the trajectory of interest rates and bond yields heading into 2024.

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In summary, Thursday’s developments underscore the ongoing tug-of-war between inflation concerns and labor market signals, keeping Treasury yields relatively stable but slightly elevated. This delicate balance will likely continue to shape market sentiment in the weeks ahead.

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