Long-dated yields capped as higher CPI raises prospect of Fed action

NEW YORK: Longer-dated Treasury yields were broadly lower on Thursday morning despite an increase in inflation, as consumer price index data raised expectations the Federal Reserve would increase Treasury purchases at the long end of the yield curve.

The Labor Department reported its consumer price index rose 0.2pc in November, slightly higher than expected by economists polled by Reuters, after being unchanged in October.

In the 12 months through November, CPI increased 1.2pc after a similar gain in October, above the 1.1pc year-on-year forecast.

Inflation remains well below the Fed's 2pc target, but any increase could still potentially push rates on the 10-year note and 30-year bond higher.

Both rates have been increasing in the past several months, enough that some analysts believe the Fed will purchase more longer-dated debt to cap yields and keep borrowing costs low.

Since March the Fed has bought more than $2 trillion worth of Treasury debt, most of it in shorter-dated notes.

The Fed's policymaking committee is scheduled to meet next week.

"The Fed is clearly out there wanting to keep expectations on rates low and that they will continue to broaden their balance sheet significantly," said Stan Shipley, macro research analyst at Evercore ISI.

"It will put upward pressure on inflation expectations as CPI was somewhat higher than expected here. Going forward, if you look at gasoline, it will probably climb again in the month of December."

The benchmark 10-year yield rose after the data release at 8:30 a.m. ET, but remained lower on the day, last down half a basis point at 0.936pc.

The 30-year yield made a similar move and was last down 1.1 basis points on the day to 1.678pc.

Since the lows hit in March, the 10-year yield has risen by more than 60 basis points, and the 30-year has risen by nearly 100.

The two-year yield, which is most sensitive to interest rate expectations, hit an all-time low in May and has since risen by about 4 basis points.

The short end of the curve was also lower on the day, with the two-year yield last down 0.6 basis point to 0.147pc.

A separate report on Thursday morning showed weekly jobless claims increased more than expected, suggesting the resurgence in COVID-19 infections and subsequent shutdowns in businesses have hampered the nascent labor market recovery.

Later on Thursday, the Treasury Department will auction off $24 billion of new 30-year debt.