Bond, Real Estate ETFs Drop After Hot CPI Report

Bond ETFs fell while stock funds moved higher after the Bureau of Labor Statistics reported that consumer prices rose faster than expected in February. 

Headline consumer prices rose by 0.4% month-over-month, matching economists’ expectations. Core consumer prices—which exclude food and energy—also rose by 0.4%, a tenth-of-a-percentage point more than economists had been expecting. Year-over-year, consumer prices jumped 3.2% while core prices rose 3.8%.

It was the second month in a row in which core CPI came in at a relatively elevated level, and possibly throws a wrench into the Fed’s plans to cut rates. 

Markets were pricing in little chance of rate cuts at the March and May Federal Open Market Committee meetings, while they suggested a 60% chance of a rate cut in June—a slightly lower probability than before the latest CPI report came out. 

Stock & Bond ETFs 

With rate cut expectations dimming, bond ETFs mostly fell in morning trading while stock funds rose. The iShares 20+ Year Treasury Bond ETF (TLT) shed 0.8%, while the iShares 1-3 Year Treasury Bond ETF (SHY) inched lower by 0.06%. Meanwhile, the SPDR S&P 500 ETF Trust (SPY) added slightly less than 1% and and the Invesco QQQ Trust (QQQ) jumped 1.1% 

The yield on the 30-year Treasury bond was last trading around 4.31%, up from last week’s low of 4.19%, but below recent highs of around 4.5%. 

Meanwhile, the 2-year yield was trading around 4.58%, up from last week’s low of 4.4%, but below the recent 4.75% high. 

The fact that yields remain well below their recent highs indicates that investors aren’t panicking about the latest inflation figures. 

The biggest reaction to the CPI report was in interest-rate-sensitive sectors, like utilities and real estate. 

The Real Estate Select Sector SPDR Fund (XLRE) and the Utilities Select Sector SPDR Fund (XLU) were last trading with losses of 0.2% and 0.4%, respectively, on the day.