Treasuries Close Modestly Higher After Recovering From Initial Weakness

After coming under pressure early in the session, treasuries showed a significant turnaround over the course of the trading day on Wednesday.

Bond prices climbed well off their early lows and managed to finish the day modestly higher. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, dipped 1.5 basis points to 4.249 percent after reaching a high of 4.344 percent.

The initial weakness among treasuries came following the release of the Labor Department’s highly anticipated report on consumer price inflation in the month of August.

The report said the consumer price index climbed by 0.6 percent in August after inching up by 0.2 percent in July. The increase matched expectations.

Excluding food and energy prices, core consumer prices rose by 0.3 percent in August after edging up by 0.2 percent in July. Economists had expected another 0.2 percent uptick.

The Labor Department also said the annual rate of consumer price growth accelerated to 3.7 percent in August from 3.2 percent in July. The annual rate of growth was expected to accelerate to 3.6 percent.

Meanwhile, the report said the annual rate of growth by core consumer prices slowed to 4.3 percent in August from 4.7 percent in July, in line with economist estimates.

Treasuries initially moved to the downside, as the bigger than expected monthly increase in core prices added to recent concerns about the outlook for interest rates.

Selling pressure waned shortly after the start of trading, however, as while economists said the data leaves the door open for another rate hike before the end of the year, it also reinforced expectations the Federal Reserve will leave interest rates unchanged next week.

“We expect Fed officials to look past the rise in headline CPI, but the uptick in the core CPI is reminder that the risks remain tilted toward additional rate hikes,” said Nancy Vanden Houten, Lead U.S. Economist at Oxford Economics.

She added, “However, we expect that a slowing economy, looser labor market conditions and moderating wage growth will support a further deceleration in inflation, allowing the Fed to keep policy steady until it begins to gradually cut rates in the mid-2024.”

Following the report, CME Group’s FedWatch Tool is indicating a 97.0 percent chance the Federal Reserve will leave interest rates unchanged next week.

Meanwhile, the FedWatch Tool is indicating a 58.0 percent chance rates will remain unchanged in November and a 40.8 percent chance of another quarter point rate hike.

Trading on Thursday may be impacted by reaction to a slew of U.S. economic data, including reports on weekly jobless claims, retail sales and producer price inflation.

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