• 10 year bond yields have spiked after a hotter than expected March CPI data was announced today.
• US10Y have risen based 4.225% and 5.00% is the next key target.
• Tomorrow’s PPI data will be important for determining whether 10 year bond yields continue to rally or start to cool down.

The recent US consumer price index (CPI) report has had a significant impact on the financial markets, particularly on US Treasury yields, highlighting the persistent nature of inflation. Following the report, the yield on the 10-year US Treasury saw a notable increase, reaching 4.56% after the auction of $39 billion in Treasury notes, up from 4.53% prior to the sale. This movement indicates a market that is becoming increasingly cautious about bond investments amid ongoing inflation concerns.

The Cost of Timing in Data Release
The timing of the CPI data release has proven to be costly. Had the report been delayed by just one day, the US government could have saved approximately $78 million annually, owing to the 20 basis points rise in 10-year yields observed today. Over the bond’s lifetime, this would amount to savings of $868 million. While these figures might seem minor in the context of the US government’s budget, the frequent occurrence of Treasury auctions and the compounding effect of higher borrowing rates could significantly increase expenses. This is particularly noteworthy as the US is projected to face a $1.6 trillion deficit in fiscal year 2024, escalating to $1.8 trillion the following year, which constitutes nearly 7% of the GDP.

Political and Economic Implications
The current political landscape suggests that the upcoming election could result in a split Congress, which would likely make deficit reduction a higher priority. Furthermore, the economic boost from legislative acts such as the CHIPS and Inflation Reduction Acts is expected to diminish by 2026, potentially leaving the economy in a vulnerable state.

The increase in Treasury yields is a concern not only for the Treasury but also for the Federal Reserve. Historical patterns indicate that the Federal Open Market Committee (FOMC) has adjusted its stance to a more dovish position when rates reached 5% in October, suggesting that this rate might serve as a ceiling, or potentially 4.80%, where early discussions of adjustments began. Higher interest rates have a tangible effect on the economy, influencing mortgages and loans that are closely aligned with yields.

The US Dollar and Global Divergence
The phenomenon of US divergence, where the US’s economic and inflation rates outperform those of other major economies, could lead to further gains for the US dollar. Inflation rates in Europe, the UK, and Canada have declined more significantly than in the US, reaching levels that might prompt central banks in these regions to consider rate cuts. This disparity has already resulted in a 1-2% gain for the US dollar today, potentially foreshadowing further strengthening.

In summary, the latest inflation report and the subsequent rise in Treasury yields underscore the challenges posed by persistent inflation and the complex interplay between fiscal policy, monetary policy, and global economic dynamics. As the situation unfolds, the impact on borrowing costs, the federal deficit, and the strength of the US dollar will continue to be areas of keen interest and concern for investors, policymakers, and the economy at large.

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