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Bond Overview: Lengthy-term authorities bond yields see their largest drop in a month as merchants recalibrate expectations for the Fed's subsequent charge hike cycle

Treasury bond yields fell along the curve on Tuesday, with long maturities posting their largest one-day declines in a month as investors lowered expectations for the Federal Reserve's next tightening cycle amid signs of easing US inflation.

What do returns do?

The yield on the 10-year government bond
TMUBMUSD10Y,
1,287%
fell 4.7 basis points to 1.276% compared to 1.323% at 3:00 p.m. Easter on Monday

2 year Treasury note yield
TMUBMUSD02Y,
0.213%
was slightly lower at 0.209%, compared to 0.213% on Monday afternoon.

The return on 30 year government bonds
TMUBMUSD30Y,
1,850%
declined 5.5 basis points to 1.863% from 1.905% late Monday.

The 10- and 30-year rates had their largest one-day declines since August 13, based at 3:00 p.m. CET. according to Dow Jones Market Data.

What is driving the market?

US Treasuries rebounded on Tuesday's data, dragging yields across the curve as traders pulled some inflationary premium and reduced their expectations of how soon the Fed might hike rates and by how much.

Read: August US inflation data allay bond market concerns about the extent of the Fed's next tightening cycle

The consumer price index rose 0.3% in August, compared with a 0.5% increase in July, the government said on Tuesday. Economists polled by the Wall Street Journal had expected August to see a 0.4% increase. Meanwhile, the rate of inflation fell last year from 5.4% to 5.3% in August. It was the first drop since last October.

Read: US consumer price rise slows in August, as the CPI shows. Has inflation reached its peak?

Tuesday's data caused traders to exceed expectations for the timing of the Fed's first rate hike and lower the expected final Fed Funds rate. However, analysts said bond investors may be overreacting to the inflation report and underestimating the persistence of underlying pressures.

Until recently, in the run-up to next week's Washington Federal Reserve Open Market Committee meeting, the focus was on the prospect of reducing monthly bond purchases by $ 120 billion. But investors also have an eye on the interest rate forecasts made by political decision-makers for 2024, which are being added for the first time.

So far, Fed officials have promised two rate hikes for 2023 and a Fed Funds rate that will hit 2.5% over the longer term. Meanwhile, expectations have faded that the Fed could use next week's meeting to announce a timetable for the tapering process, with November now seen as more likely.

See: Online traders see little chance of Fed throttling at next week's meeting

In other US economic data, the National Federation of Independent Business announced that its Small Business Optimism Index rose 0.4 points to 100.1 in August. Small business owners said they were a little more optimistic about the economy in August, the survey found, but complained that a record shortage of labor and supplies hurt sales and profits and hampered recovery from the pandemic.

What do analysts say?

“Inflation and subsequent slower growth are the major fears of the markets and it will take a number of reassuring numbers to change that. I can't imagine it happening, ”said Kit Juckes, global macro strategist at Société Générale, in a note.

While recent inflation data has been very optimistic, "we suspect the impact on next week's Fed meeting outside of initial reaction will be minimal," Marc Chandler, chief market strategist at Bannockburn Global Forex, said in a note. "The tapering is well on its way to starting before the end of the year."

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