Trading US Inflation Is Muddying Bond Market’s Auction Gameplan

Bond traders have plenty on their plates the next couple days, even after they absorb a crucial US inflation reading that stands to shape expectations for Federal Reserve policy for months to come.

All eyes are on February’s consumer-price index, to be released at 8:30 a.m. Washington time Tuesday, arguably the most significant report left before the Fed meets next week. Treasuries are coming off two months of losses, and traders are on high alert for a repeat of four weeks ago, when a surprisingly sticky CPI figure battered bonds. After the economy was wracked by the highest inflation in decades, investors have been pleasantly surprised by how quickly it’s receded, so last month was a rude awakening.

A hot reading Tuesday isn’t the base-case for most economists. But it’s a scenario that risks roiling Treasuries by pushing traders to bet the Fed will wait until later in the year to cut rates. Such an outcome would complicate the setup for a duo of long-term government-debt auctions ahead this week: a $39 billion reopening of 10-year notes at 1 p.m. Tuesday and a $22 billion reopening of 30-year bonds Wednesday.

Inflations Surprises Spur Big 10 Year Yield Swings

“CPI days have produced outsize moves in general, and auctions have done better on low volatility days,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.