TREASURY WRAP: T-NOTE FUTURES (H6) SETTLES 4 TICKS HIGHER AT 112-08+

TREASURY WRAP: T-NOTE FUTURES (H6) SETTLES 4 TICKS HIGHER AT 112-08+

• T-Notes rallied following softer-than-expected CPI data, leading to a bull steepening of the yield curve.
• The US Treasury's 30-year bond auction showed strong demand, with a high yield of 4.825%.
• Fed's Williams anticipates inflation peaking mid-2026, with a stable labour market expected this year.

The recent release of softer-than-expected Consumer Price Index (CPI) data has led to a notable rally in T-Notes, with the yield curve experiencing a bull steepening. This movement reflects a decrease in front-end yields, as market participants perceive reduced upside risks to inflation. The CPI data, while softer, is not expected to significantly alter the Federal Reserve's current policy stance. Fed officials are likely to require additional data points to confirm that inflation is not accelerating before considering any policy shifts. The next potential rate cut is currently priced for mid-2023, contingent on further progress towards the Fed's inflation target and potential changes in labour market conditions.

In the bond market, the US Treasury's 30-year bond auction demonstrated robust demand, with a high yield of 4.825%. This yield stopped through the When Issued by 0.8 basis points, indicating stronger demand compared to previous auctions. The auction's success is attributed to increased investor demand for term premium, particularly in light of the Department of Justice's probe into the Federal Reserve. The auction's breakdown revealed a rise in indirect demand to 66.77%, surpassing the average, while direct demand slightly decreased.

Fed's Williams provided insights into the central bank's outlook, noting that policy remains "moderately restrictive" and is well-positioned. He expects the labour market to stabilise this year and anticipates inflation to peak by mid-2026, with a return to target levels by 2027. Williams also highlighted increased downside risks to employment, which could influence future monetary policy decisions.

In short-term interest rate markets, the implied Fed rate cut pricing remains unchanged for January, with slight adjustments for March and December. The Effective Federal Funds Rate (EFFR) and Secured Overnight Financing Rate (SOFR) both held steady at 3.64%.

Overall, the market's reaction to the CPI data and bond auction results underscores the ongoing focus on inflation dynamics and monetary policy expectations. Traders and market participants are closely monitoring these developments as they assess potential impacts on various asset classes.

Trader Insight:

• Some traders may consider monitoring US 10-Year Treasury yields for further movements following the CPI data.
• Market participants are watching the TLT ETF for potential opportunities in long-duration bonds.
• Analysts note that traders are assessing the USD/JPY currency pair for reactions to US inflation data and Fed policy expectations.
• Investors could view the XLF ETF for insights into financial sector performance amid changing interest rate dynamics.

Disclaimer: This is not trading advice. For informational purposes only.