The Conviction And The Caution

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The 10-Year Yield Sits at 5.24%. A 3.7% CPI Print Could Decide What Happens Next.

Quick take: Stocks are wobbling on Monday, but the louder signal is in bonds. The 10-year Treasury yield closed Friday at 5.24%, mortgage rates are above 7%, and September CPI lands on Wednesday morning. This is the number the market is waiting on.

What is happening

At 11:31 a.m. ET, the Dow was up about 0.49% near 51,909, the S&P 500 was roughly flat (-0.06%) near 7,807, and the Nasdaq Composite was down about 0.37% near 27,265, according to Motley Fool’s midday report. Investors rotated toward value and away from technology, with Brent crude near $106 adding to inflation worries.

Meanwhile the Treasury market is under pressure. The 10-year yield ended Friday, October 9, at 5.24%, up 2 basis points from 5.22% the day before. It hit an intraday high of 5.365% on October 7, and one analysis describes yields as being near their highest in more than two decades. The 2-year yield, which tracks near-term Fed expectations, rose 5 basis points to 4.80%, so the gap between the two narrowed from 47 to 44 basis points.

Key numbers

  • 10-year yield: 5.24% (October 9 close); 2-year: 4.80%
  • 10-year auction bid-to-cover: 2.77; 30-year auction: 2.54
  • Average 30-year fixed mortgage rate (Freddie Mac): 7.40%, up from the prior week
  • August CPI: +0.4% month on month, 3.4% year on year; core 2.4% year on year
  • September CPI forecasts: about 3.6% to 3.7% year on year for the headline, with core near +0.2% month on month
  • Fed funds futures put the chance of an October 28 hike at about 26% as of October 7

Why it matters

Higher yields raise borrowing costs for households and companies, and they compete with stocks for investor money. The forecast headline rise is driven mostly by energy, so the Fed is likely to focus on core and services inflation. One scenario analysis suggests a hot core print could push hike odds and yields higher and pressure equities, while a soft print could do the opposite. Those scenarios are one analyst’s illustration, not a forecast, and oil could still override a soft core reading.

What to watch next

  • Wednesday, 8:30 a.m. ET: September CPI, headline and core
  • Thursday: Producer Price Index
  • Bank earnings this week, for a read on credit and loan demand
  • October 28: the Fed’s next decision
  • The 10-year yield’s reaction around 5.28% to 5.37%, the recent high zone

Impact on Indian markets

Elevated US yields and crude near $106 are typically uncomfortable for India: a stronger dollar and higher US returns can encourage foreign portfolio outflows and weigh on the rupee, while costly oil widens the import bill. A cooler CPI print would likely ease some of that pressure, and a hot one would add to it. Indian investors may want to track US yields alongside Brent before the Sensex and Nifty open on Thursday.

Sources

Disclaimer: This post is for educational and informational purposes only and is not investment advice. Consult a licensed financial advisor before investing.

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