Inside Markets — Pullback in Bond Yields

The fundamental driver of today’s pullback in bond yields was Friday afternoon’s nomination of Bessent to run Treasury.  But the post-election selloff in Treasuries exacerbated what was already oversold technical conditions as the premium-weighted put/call ratio reached extreme levels on 11/12.  Two days later, ten-year Treasury prices signaled a loss of bullish momentum, followed by similar divergences over the next two sessions (11/15 and 11/18).  We see today’s pullback in bond yields as confirmation of a technical reversal with 10-year yields finding initial support neat 4.19%.

Wednesday’s release of October core PCE inflation is the next important catalyst for markets.  On a MoM basis, consensus is looking for +0.3% (unchanged from September), which will likely take the YoY rate to +2.8% from 2.7% last month. Core PCE is the Fed’s preferred inflation gauge, so any upside surprise (something over 3%) would greatly reduce the probability of a December rate cut and put resumed upward pressure on bond yields.  That’s not our expectation, but that type of outcome would result in increased equity market volatility into year-end.  We expect next Friday’s (12/6) Jobs Report and November CPI (12/11) will have greater influence over the Fed’s December rate decision, the policy path going forward and the near-term direction of bond yields.