Bond investors are closely watching the upcoming Producer Price Index (PPI) release, using it as a proxy for the Consumer Price Index (CPI) amid rising inflation concerns. Historically, when PPI data precedes CPI, it tends to influence trading decisions more heavily, despite the lack of strong correlation between the two indicators. With inflation on an uptrend, a stronger-than-expected PPI could lead to a swift rise in bond yields, as investors anticipate sustained inflation pressures and fewer chances for rate cuts.
December's core PPI is forecasted to have accelerated to 0.3% m/m, up from 0.2% in November, with y/y growth likely rising to 3.8% from 3.4%, according to a Bloomberg survey. This potential increase in production costs suggests higher CPI readings, prompting investors to demand higher returns on bonds to offset anticipated decreases in purchasing power. As a result, bond traders may be reluctant to buy Treasuries before the CPI data, especially if the PPI reading is strong.
The 10-year Treasury yield is currently at 4.80% as of 17:41 on January 13, slightly up from its last close of 4.78%. Investors are allowing yields to rise to more attractive entry levels, with the potential for yields to approach the significant 5% mark if the PPI data confirms heightened inflation concerns.