U.S. Government bonds tumble as CPI data in line with market expectations

The U.S. Treasuries tumbled Tuesday after recent data showed that the country’s consumer inflation climbed in line with market expectations in September, strengthening bets for a Fed rate hike in December.

The yield on the benchmark 10-year Treasury note rose more than 1 basis point to 1.77 percent and the yield on 30-year bond jumped 2-1/2 basis points to 2.54 percent by 12:50 GMT.

The September US CPI report revealed a 0.3 percent m/m reading, versus the unrevised 0.2 percent m/m result that occurred in August, in line with expectations for a +0.3 percent m/m result. On an annual basis, it climbed 1.5 percent y/y, from the previous reading of 1.1 percent.

Overall, the headline found upward pressure from an increase in owners' equivalent rent 0.4 percent m/m, alongside a 2.9 percent m/m result from energy prices. Despite the overall dampness seen in recent months, we expect a gradual pick-up in inflation readings will be seen in the months ahead (as suggested by headline y/y gains). However, we are unlikely to see a substantial move towards the Fed's 2 percent objective until we see greater traction from wage pressures.

The Federal Reserve Chair Janet Yellen indicated that the Fed may need to promote a “high-pressure” economy in order to fully recover. Yellen added that increased business sales would almost certainly raise the productive capacity of the economy by encouraging additional capital spending, especially if accompanied by reduced uncertainty about future prospects.

Additionally, Yellen contended that a tight labour market might draw in potential workers who would otherwise sit on the sidelines and encourage job-to-job transitions that could also lead to more efficient - and, hence, more productive - job matches. Yellen furthered that strong demand could potentially yield significant productivity.

Lastly, markets now look ahead to a greater flow of data in the week ahead, highlighted by housing starts/building permits, Empire manufacturing and Philadelphia Fed manufacturing releases.

Meanwhile, the S&P 500 Futures traded 0.72 percent higher at 2,138.25 by 12:50 GMT.