The Risk Is More Dovish Than Hawkish From CPI

By Ven Ram, Bloomberg Markets live strateigst and commentator

Treasuries are holding their composure ahead of today’s U.S. CPI data, which is expected to show a fifth month of acceleration.

How the inflation landscape has so dramatically changed from a year ago is borne out from the Bloomberg economists’ survey, where not a single forecast is below 7%. The firm conviction stems perhaps from mild prints one year earlier. You would assume the outlook is baked into the markets by now – meaning any downside surprise will have a greater impact on immediate price action than a higher-than-forecast number.

For instance, a headline CPI number even slightly below 7% and an on-month core print below 0.5% would make the markets question its conviction on the need for a 50-basis point increase in March. While a print in line with the median will keep the speculative embers alive, the Fed will have the benefit of seeing the numbers for February before making a final call

Unless the numbers are shockingly soft, Treasury yields are likely to continue their trek higher — perhaps not immediately, though, given Wednesday’s auction demand — with the 10-year rate likely to approach 2.0904%. A number that is in line with the median forecast is likely to also keep front- and intermediate yields on the boil. In November, MLIV posited that front-end bonds represent a ticking time bomb and forecast the two-year yield to reach 1.75%, and the securities are well on there way to their intended destination.