The 10-year yield fell 15 basis points in a hot inflation week

The 10-year Treasury yield fell 15 basis points last week, to 5.09% on Friday, even as consumer and producer prices rose sharply and crude oil surged. The largest drop came Thursday. CNBC reported that yields fell that day as investors cashed in technology shares and fled to the safety of bonds after the producer-price release.

"The selloff in chip stocks offers support to bonds, helping keep yields in check despite the inflationary signals," said Uto Shinohara, senior investment strategist at Mesirow Currency Management.

The fall was in the real yield

A 10-year Treasury yield is a real yield plus a breakeven rate. The breakeven is the inflation compensation in that yield.

The real yield fell 17 basis points, to 2.74%. The breakeven rose 2 basis points, to 2.35%. The week's decline was a lower real yield, not lower inflation compensation.

The long end fell more than the two-year, so the curve flattened. The gap between them narrowed by 9 basis points, to 35 basis points. The three-month yield barely moved.

The cash Treasury market was closed Monday. From 5.24% the Friday before, the 10-year yield was 5.21% on Tuesday, so 3 of the 15 basis points were already gone before either inflation report. It closed Wednesday at 5.19%, down another 2 basis points. The two-year yield rose 3 basis points that day, to 4.82%.

Thursday's drop was 9 basis points, to 5.10%, the day producer prices were released. Friday's close was 5.09%, 1 basis point lower. The two-year yield finished the week at 4.74%.

The iShares 20+ Year Treasury Bond ETF BTLT rose 2.7%. The iShares 7-10 Year Treasury Bond ETF BIEF and the iShares TIPS Bond ETF BTIP each rose 1.1%.

The U.S. dollar index slipped 0.4% on the week, to 101.84, and the Invesco DB US Dollar Index Bullish Fund CUUP fell 0.3%. CNBC reported Thursday that the dollar pulled back from an 18-month high as Treasury yields fell.

Prices rose sharply, and not only at the pump

The U.S. Bureau of Labor Statistics said Wednesday that September consumer prices rose 0.6% from August and 3.7% from a year earlier, after 0.4% and 3.4% in August. Gasoline rose 9.1% and accounted for more than half of the monthly increase. Core prices, excluding food and energy, rose 0.3% on the month, as they had in August, and 2.6% on the year.

"CPI came in hot and it wasn't just fuel prices," said Sonu Varghese, chief macro strategist at Carson Group.

Producer prices, out Thursday, were the larger surprise. Final demand rose 1.3% in September, the largest monthly gain since March 2022, and 6.3% from a year earlier. Trading Economics said that was well above forecasts of 0.5%.

Energy prices jumped 10.8% and accounted for more than 80% of the rise in goods prices, the bureau said.

An October increase became a minority case

In September the U.S. Federal Reserve raised its target range for the federal funds rate to 3.75% to 4.00%.

"I also currently expect that it will be appropriate to raise rates a bit further before the end of the year to ensure a timely and durable return of inflation to the Committee's 2 percent target," Susan Collins, president of the Federal Reserve Bank of Boston, said Tuesday.

Reuters reported that Mary Daly, president of the Federal Reserve Bank of San Francisco, said Wednesday the Fed would probably need to raise short-term rates further, and that she signaled there was no need to do so at the Oct. 27-28 meeting.

On Interactive Brokers' prediction markets, an October increase was a live chance on Wednesday and a minority case by Friday. Jose Torres, the firm's senior economist, wrote Friday that those odds were 47% on Wednesday and 14% by Friday. He tied that drop to remarks from Federal Reserve Chair Kevin Warsh, which he said signaled a patient, gradual approach rather than an aggressive hiking cycle.

"I don't prejudge meetings. I don't believe in saying now what I might do at the meetings that we have in the balance of this year," Warsh said at an International Monetary Fund meeting in Bangkok, Trading Economics reported Friday.

Technology and high-yield credit took the loss

Technology shares were already falling before the inflation reports. The State Street Technology Select Sector SPDR ETF AXLK fell 1.2% on Monday and finished the week down 7.7%. The Nasdaq-100 fell 5.5%.

The S&P 500 fell 2%, to 7,659.44. The Dow rose 0.7%. The State Street Consumer Staples Select Sector SPDR ETF AXLP rose 5.0%.

Long-term Treasurys rose. High-yield credit did not get the same lift. Through Thursday, the ICE BofA US High Yield Index option-adjusted spread widened by 12 basis points, to 323 basis points, from 311 the Friday before.

The iShares iBoxx $ High Yield Corporate Bond ETF BHYG finished the week down 0.5%. The iShares iBoxx $ Investment Grade Corporate Bond ETF ALQD rose 1.0%.

"High yield credit that is exposed to AI was bludgeoned while other pockets of high yield were resilient," Josh Adams, a portfolio manager at Cincinnati Asset Management, wrote Friday.

This week's oil is not in September's price index

West Texas Intermediate crude rose 10.4% on the week, to $101.41. Brent crude rose 4.9%, to $109.86.

The United States Oil Fund, LP BUSO rose 9.1%, short of the gain in West Texas Intermediate. The State Street Energy Select Sector SPDR ETF AXLE rose 4.9%.

The oil fund rose on Monday and Tuesday, before either inflation report, and its largest gains came Thursday and Friday.

Reuters reported Wednesday that Houthi forces had struck Saudi Aramco's headquarters. On Friday, Reuters reported that Brent touched $110 a barrel for the first time since May, on worries that tensions in the Middle East could further tighten supplies, while investors assessed how much diesel Russia could supply.

September's consumer-price index measured September's gasoline, which rose 9.1%. This week's rise in crude is not in that index. The inflation compensation in the 10-year rose 2 basis points in the same week.