US Treasury Yields Plunge Below 5% on December Core CPI Slowdown

20-year Treasury yield drops to 4.96% from over 5%

Core CPI rises only 0.2%, lower than expected

On the 15th (local time), the U.S. market, which had been worried about inflation and the suspension of interest rate cuts due to the December Consumer Price Index (CPI) and a more stable-than-expected core CPI, breathed a sigh of relief as U.S. Treasury yields plummeted.

On this day, the U.S. Bureau of Labor Statistics announced that the December consumer prices rose by 0.4% as expected, and the core CPI rose by only 0.2%, less than expected. On an annual basis, the headline CPI recorded 2.9%, and the core CPI recorded 3.2%. The core CPI is at its lowest level in six months.

The 20-year U.S. Treasury yield, which had been over 5% since last week, plunged 10 basis points (1bp=0.01%) after the December CPI announcement, dropping to 4.965% below 5%. The 10-year Treasury yield also plunged 11bp to reach 4.676%.

Stock index futures markets also turned upward. Dow futures surged 1.5%, while S&P futures and Nasdaq futures jumped 1.5% and 1.7%, respectively.

Although the December headline CPI met expectations, it rose more than the 0.3% increase in November. On the other hand, the core CPI, excluding energy and food prices, rose by only 0.2%, less than the expected 0.3%, bringing the annual core inflation down to 3.2%, which was positively received by the market.

Economists surveyed by Bloomberg expected a 0.4% rise in the headline CPI, while those surveyed by Dow Jones expected a 0.3% increase, but all expected a 0.3% rise in the core CPI.

The two most significant factors in calculating U.S. consumer prices are the owner's equivalent rent (OER) and primary residence rent (RPR). These two factors rose by 0.3%, the same as in November, leading to a slowdown in the rise of core consumer prices.

In December, energy costs rose by 2.6% in a month, but overall showed a downward trend for the year, and the price increase for other goods excluding food and energy was minimal.

The December CPI was announced at a crucial time for both investors and policymakers. The 10-year Treasury yield had risen more than 0.5 percentage points since December 11, when the November CPI was announced higher than expected. Subsequent service PMI and employment data also mostly suggested upward pressure on consumer prices.

However, it still seems that there is no room for complacency regarding inflation and bond yields. Economists expect that the tariff and tax cut policies and the illegal immigration deportation measures to be introduced by the second Trump administration next week will accelerate inflationary pressures in the U.S.

Kim Jung-ah, Guest Reporter kja@hankyung.com