Bond ETFs Spike Post-Inflation Data, but Traders Sell

Bonds rallied and yields fell after an in-line inflation reading prompted traders to up their bets on a Fed rate cut next month.

On Wednesday, the Bureau of Labor Statistics reported that consumer prices in the U.S. rose by 0.2% from September to October, as expected. 

Core consumer prices, which exclude food and energy, rose by 0.3%, also as expected.

The news was welcome for bond bulls who had been reeling following a string of down days in the wake of Trump’s election win. Economists widely expect that Trump’s policies could lead to stronger growth, inflation, and deficits, all of which tend to weigh on bond prices.

Bond ETFs Rally Then Drop as Traders Sell

But at least today, bonds are getting a respite from that selling. Following the release of the CPI data—which also showed that headline inflation and core inflation rose by 2.6% and 3.3%, respectively, on a year-over-year basis—the probability of a December Fed rate cut increased.

The pricing of Fed funds futures suggests that there is a 79% chance that the U.S. central bank slashes rates by 25 basis points on Dec. 18, up from 60% before the release of the CPI figures.

Bonds and the exchange-traded funds that hold them rallied on Wednesday—at least initially. The iShares 7-10 Year Treasury Bond ETF (IEF) gained as much as 0.46%, while the iShares 20+ Year Treasury Bond ETF (TLT) jumped as much as 0.97%.

However, as of this writing, the funds were giving up much of those gains as traders used the rally as an opportunity to sell.

Indeed, while today’s inflation data may have boosted the chances of a December Fed rate cut, the market is still pricing in far fewer rate cuts today than it was a few months ago.

Current Fed funds futures pricing indicates that there may only be two more Fed rate reductions next year after the one in December.

Without the support of Fed rate cuts, bonds are left to focus on the Trump effect, which is largely seen as bond-negative.