Treasury yields fall as German CPI data helps to drive peak-inflation narrative

U.S. bond yields dropped on Tuesday as a pullback in global energy prices and a decline in German inflation spurred hopes that global central banks could turn to less aggressive monetary policy. The yield on the 2-year Treasury TMUBMUSD02Y, 4.374% fell to 4.37% from 4.399% on Friday.

The U.S. bond market was closed on Monday in observance of New Year's Day. The yield on the 10-year Treasury TMUBMUSD10Y, 3.782% retreated to 3.739% from 3.826% late Friday.

The yield on the 30-year Treasury TMUBMUSD30Y, 3.889% dropped to 3.838% from 3.934% Friday afternoon. Germany's consumer price index fell by more than expected in December to a four-month low, preliminary data showed on Tuesday. The CPI increased 8.6% in December on an annual basis, down from 10% in November, as lower fuel prices helped to push down energy costs.

Ten-year bund yields BX:TMBMKDE-10Y fell 8.5 basis points to 2.368%, tracking declines in Treasury yields, as worries about global growth also persisted.Traders boosted the odds of a smaller-than-usual 25-basis-point rate Federal Reserve rate hike in February, to 72% from 68% on Friday, which would take the fed funds rate target to between 4.5% and 4.75%, according to the CME FedWatch tool. The central bank is mostly expected to lift borrowing costs to at least 4.75% and 5% by June, according to 30-day Fed Funds futures.In U.S. data released on Tuesday, a final reading of the S&P Global U.S.

manufacturing PMI came in at 46.2 for December, unchanged versus an initial estimate and down from 47.7 in the prior month.Over the weekend, one major central banker stressed the need to keep tightening monetary policy, despite warnings from the International Monetary Fund that that the U.S., European Union and China economies are all slowing at the same time. European Central Bank President Christine Lagarde told a Croatian newspaper that: 'At the moment, ECB policy rates must be higher to curb inflation and bring it down to our target of 2%…That process is essential because it would be even worse if we allowed inflation to become entrenched in the economy.'What analysts are saying 'Treasuries are ringing in the new year with a meaningful rally that has brought 10-year yields as low as 3.73% during the overnight session,' said BMO Capital Markets rates strategists Ian Lyngen and Ben Jeffery. 'The primary trigger was another sizeable decline in German regional CPIs during December; further evidence supporting the European peak inflation narrative.' 'The pullback in global energy prices has also been supportive of the bid in Treasuries as the mild start to the winter has allayed concerns regarding the prospect for significant energy shortages,' they wrote in a note.

Risk assets have started 2023 on strong footing, with the operating assumption 'being that anything which limits the aggressiveness of global central banks from here (such as negative regional CPIs in Germany), will be a net positive for risk assets.'