Inflation expectations reignite! PPI to be announced soon, U.S. bond market under pressure first.

Before the release of key economic data in the United States, US bond prices fell. The market expects the upcoming data to show a rise in inflation pressure, which could weaken market expectations of a rate cut by the Federal Reserve. The yield on the 10-year Treasury note rose by 1 basis point to 4.04%, ending a three-day streak of gains. Earlier this week, bond yields had fallen to their lowest level of the month. This volatility comes as the September Producer Price Index (PPI) data is set to be released, with economists expecting a potential increase in the index. Currently, traders are betting that there is an 80% chance the Federal Reserve will cut rates by 25 basis points on December 10th. However, a rebound in inflation could influence future policy decisions. Anwiti Bahuguna, Global Chief Investment Officer at Northern Trust Asset Management, said that due to the government shutdown, several economic data releases in the US have been delayed. This suggests that the Federal Reserve may implement a "precautionary rate cut" next month to wait for a clearer economic outlook concerning inflation. "We are indeed in an economy where we may see another acceleration of growth with a rate cut," Bahuguna said in an interview. She added that increased fiscal spending by the US government next year could also put pressure on the bond market. She sees a rise in inflation as a major risk for next year, revealing that her current positions include underweighting US Treasury bonds and overweighting inflation-protected bonds. Additionally, the US Treasury Department will sell 5-year Treasury notes and resume the issuance of 2-year Treasury notes on Tuesday, adding to the supply in the bond market. Investors exhibited aversion in Monday's auctions of 3-month and 6-month Treasury bills. Evelyne Gomez-Liechti, strategist at Mizuho International Securities, noted that after last week's risk-averse sentiment, investors are returning to high-risk assets. "With support for risk assets and a rebound in the market following nonfarm data, one risk I see is that yields could retreat from current levels, as the 10-year yield is nearing the key level of 4% which acted as resistance in September and October," she stated.