The FOMC raised rates another 75 basis points (bps) in November. Yields fell and the curve flattened after October inflation data surprised to the downside. The 10-year U.S. Treasury yield closed on the lows for the month at 3.62%. The 2-year/10-year curve inverted further to -74 bps, signaling a looming recession and expectations of a Fed pivot in the future.

CPI rose 0.4% in October, below consensus, to 7.7% year-over-year, prompting the largest Treasury rally in over a decade. Shelter costs, a lagging inflation component, remain high. Meanwhile, the Fed has emphasized a focus on Core CPI ex-shelter. U.S. TIPS underperformed, with the greatest weakness seen in the front end, as commodity prices declined, and the market priced in greater odds of success in the fight over inflation.

The market also interpreted recent Fed commentary as dovish, with speakers implying a slower pace of rate hikes starting with the December meeting. The terminal fed funds rate remains between 4.75% and 5%, which is expected to be achieved by mid-year 2023.

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