The 10 year yield at 4.86 percent is the bond market verdict on December, and it says the Federal Reserve will raise rates whether the inflation report cooperates or not. The 10 year Treasury yield sat near 4.86 percent after Monday rally, with the 2s10s curve at plus 35 basis points and the real yield at a restrictive 2.63 percent.
Why it matters
The bond market has moved first all year. The 10 year yield rose about 4 basis points to roughly 4.87 percent after the October jobs report, and the 2 year yield, which is especially sensitive to expected changes in the federal funds rate, climbed about 5 basis points to around 4.52 percent. The dollar index gained about 0.7 percent to 102.22, its biggest daily gain in nearly five months, and spot gold fell nearly 1 percent. The repricing came fast, and the bond market has moved first all year, ahead of the stocks and ahead of the Federal Reserve itself.
The pricing is now near unanimous. Traders put the odds of a December hike at about 80 percent or higher, and Governor Christopher Waller has said the Fed ought to raise rates in December even if inflation cooled in October. Markets are now fully pricing a hike, and the only debate left is whether it is a quarter point or a half point.
What happens next
The inflation report due on Tuesday is the last piece of evidence before the December 8 and 9 meeting. Economists expect a 0.3 percent monthly rise, with core at 0.2 percent, and there will be no official annual rate because last year shutdown left a gap in the data. A hot number would confirm the bond market. A cool one would test it, and the test will come within minutes of the release.
What happens next will be decided at 8:30 a.m. Eastern, when the report lands. If the bond market is right, the December hike is already in the price, and the reaction will be muted. If it is wrong, the repricing will be sharp. For now, the yield curve is the clearest statement in the market, and it says hike, whatever Tuesday number brings.
