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Bonds Love the October Inflation Report

By:Christopher Vecchio - CFA

The long-end of the U.S. Treasury yield curve continues to exhibit signs of topping out, particularly in the 10s (/10Y). Where next?

  • The long-end of the U.S. Treasury yield curve continues to exhibit signs of topping out, particularly in the 10s (/10Y).
  • A softer-than-expected October U.S. inflation report is catalyzing a sharp drop in Federal Reserve rate hike odds.
  • Volatility remains relatively elevated in 30s (/ZBZ3) and ultras (/UBZ3).

Fig. 1: Year-to-date price percent change chart for /ZT, /ZF, /ZN, /ZB, /UB
Fig. 1: Year-to-date price percent change chart for /ZT, /ZF, /ZN, /ZB, /UB

Market update: U.S. 10-year yield down to 4.454%

Today may have been a seminal turning point in the Federal Reserve’s fight against inflation. While we’re not out of the woods just yet—base effects cater to continued elevation in November and December readings—the October U.S. consumer price index came in softer than anticipated, suggesting there’s no need for additional rate hikes moving forward.

The data follows a November Federal Open Market Committee (FOMC) meeting where Federal Reserve Chair Jerome Powell laid the groundwork for no more rate hikes moving forward. Fed Funds futures are now discounting a 100% chance of no change in rates at either the December 2023 or January 2024 FOMC meetings, and a 34% chance of a 25-basis-points (bps) rate cut at the March 2024 meeting.

The October U.S. inflation report is another piece of evidence that bond markets have bottomed. In recent weeks, we’ve noted how positioning in the futures market was the most net-short in history as volumes had reached exhaustion levels. Price action continues to turn the corner, from both a price and yield perspective.

/10Y US 10-year Note Yield Technical Analysis: Daily Chart (May to November 2023)


The uptrend in 10-year yields may soon be finished as the uptrend from the May, July and September swing lows is under pressure around 4.45/50%. Meanwhile, a head and shoulders pattern may be forming with a neckline that also comes in around 4.472%. With the 10-year yield having topped at 5.013% on Oct. 23, the measured move would see a drop to 3.931%.

/ZB US 30-year Bond Price Technical Analysis: Daily Chart (May to November 2023)


We’re continuing to monitor the 30s (/ZBZ3), given the relatively higher volatility at the long-end of the curve (IV Rank = 48.5, IV Index = 15.6%). The last time we looked at /ZBZ3, we noted that “a short put vertical (long 108 put/short 110 put) for the Nov. 24 expiry (22DTE) is suggesting a POP of 76%.” Now, that same trade (10DTE) is pricing in a POP of 97%. Extending the time horizon to 38DTE, the POP is 86%.

/ZBZ3 has maintained its turn higher above its daily 21-EMA (one-month moving average) after closing above it Nov. 2; it held as support yesterday. MACD (moving average convergence/divergence indicator) is now trending higher through its signal line, and slow stochastics are holding in overbought territory. The bond bottoming process is continuing cleanly, plain and simple.

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

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