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Bond Report: U.S. bond yields rise further each day after August CPI shock

The two-year Treasury yield edged up from its highest level in almost 15 years on Wednesday, despite another straight monthly drop in the expenses for U.S. wholesale goods and services, as traders continued to digest an unexpectedly hot consumer-price index for August.

Whats happening?
  • The yield on the 2-year Treasury TMUBMUSD02Y, 3.792% rose to 3.788%, carrying out a surge of 18.3 basis points to 3.754% on Tuesday. That marked the largest one-day gain since Aug. 5 and the best level for the yield since Nov. 1, 2007, predicated on 3 p.m. levels, in accordance with Dow Jones Market Data.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.440% rose to 3.439%, an even near to the 3.422% seen late Tuesday. However the prior-session climb of 6.1 basis points marked the largest one-day jump since Sept. 6, and highest yield level since June 14.
  • The yield on the 30-year TreasuryTMUBMUSD30Y,3.511%rose to 3.515% from 3.506% on Tuesday.
Whats driving markets?

Investors and traders were still attempting to absorb Tuesdays surprising August CPI, which rose to a monthly rate of 0.1% versus the 0.1% decline that has been expected by economists. The headline annual rate also came in greater than expected at 8.3%, and much more troubling was a doubling of monthly core inflation, which strips out energy and food costs.

Read:U.S. inflation slows again because of cheaper gas, CPI shows. But prices still high for nearly the rest

However, data released on Wednesday showed the cost of wholesale goods and services fell by 0.1% in August because of cheaper gas, the next monthly decline in a row. Economists dont expect the decline in wholesale costs to be sustained though.

Fed funds futures traders are actually pricing in a 68% chance that the Federal Reserve lifts its benchmark interest by 75 basis points in a few days, and a 32% potential for a 100 basis-point hike, in accordance withthe CMEs FedWatch tool.

What analysts say

Producer prices were relatively muted in August, held down by falling energy prices and otherwise moving essentially needlessly to say, Will Compernolle, senior economist at FHN Financial, said in an email. Overall, the August PPI didnt rise enough to help expand flare up anxieties from yesterdays CPI. While a 100bp hike continues to be a chance at next weeks FOMC meeting, this report wont function as guiding factor pushing the Fed in either direction.

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