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What you need to know
- Treasury yields recorded their largest intraday drop since August Wednesday, after newly released data on consumer inflation revived the hope of more interest rate cut this year.
- Even with Wednesday's decline, the 10-year Treasury yield, which influences commercial and consumer lending rates, remains a full percentage point higher than it was when the Federal Reserve began cutting interest rates in September.
- Stocks got a boost from lower yields on Wednesday, with the S&P 500 on track to have its best day in more than two months.
Treasury yields tumbled on Wednesday as market participants breathed a sigh of relief that there were few surprises in December's consumer inflation data.
On Wednesday, the 10-year Treasury rate dropped by 14 basis points. This is its largest intraday drop since August.
The inflation rate rose in December as expected by Wall Street and economists. The Federal Reserve considers core inflation to be more accurate than other measures of price pressures because it excludes energy and food prices. Core inflation slowed down last month, reaching its lowest point since July.
In recent weeks, market participants became increasingly anxious that the Fed would not be able to cut interest rates as aggressively this year as expected. Many market participants are worried that the Fed may have to change course to raise interest rates to get inflation back to its 2% goal.
A Rate Cut is More Likely Now that New Data on Inflation Favors It
The Fed’s Wednesday inflation report encouraged investors to expect a rate cut at least once this year. According to data from fed funds futures, the odds that the Fed will cut its benchmark federal funds rate by at least 25 basis points before the end of this year have increased to 64%. No rate cuts this year are less likely than they were before, with odds dropping from almost 26% down to under 17%.
A slew of strong economic reports and the imminent inauguration of President-elect Donald Trump—whose tax, immigration, and tariff policies some economists warn could reinvigorate inflation—has caused yields to climb relatively steadily in recent months. The 10-year Treasury rate, which is used to determine a variety of consumer and commercial lending rates, increased more than one percentage point since mid-September. Meanwhile, interest rates at the Fed have been cut by that same amount.
Stocks are under pressure from rising yields. The S&P 500 as of Wednesday had pulled back about 3% from the record high it hit in early December. The higher rates harm equities because they increase borrowing costs and eat into profits for companies, while diverting money from stocks to bonds. Stocks popped on Wednesday, with the S&P 500 on track to have its best day since November.
Treasury yields have also pushed up interest rates, which has affected consumers and prospective homebuyers. The mortgage rate has risen since September. A housing market which was previously expensive is now even more inaccessible.
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