(Bloomberg) -- Treasuries surged as easing US consumer inflation prompted traders to increase wagers on more than one Federal Reserve interest-rate cut this year.
The advance on Wednesday pushed yields lower across maturities after data showed underlying inflation rose in May by less than forecast for the fourth month in a row. The monetary policy-sensitive rate on two-year notes dropped six basis points to 3.96%, erasing an earlier increase.
Traders priced in 47 basis points of Fed easing by the end of the year, compared to about 42 basis points at Tuesday’s close. While the Fed’s next move is fully priced in for October, traders increased expectations for a cut in September to around odds of 75%.
“It’s a clean downside surprise and not just in the headline. The breadth of the softening gives the Fed real cover,” Haris Khurshid, chief investment officer at Chicago-based Karobaar Capital. “One cut is back in play, no question,” and two are possible if wholesale prices and labor market data cooperate.
Fed officials have said they are waiting to see to what degree the cost of President Donald Trump’s tariffs ripples into measures of inflation and boosts expectations for further price pressures, before resuming an easing cycle.
The central bank has held policy steady this year after adjusting its reference rate lower to 4.25%-4.5% in December. It’s widely expected to keep the rate on hold again when policymakers gather next week. However the May inflation figures may allow them to retain their March forecast of two quarter-point cuts this year in their next quarterly “dot plot” of anonymous projections by committee members.
“The dots will be interesting as it signals the Fed’s reaction function, and the CPI data should curtail some of the hawkish risks and probably lowers the hurdle to signal the easing bias,” said Priya Misra, portfolio manager at JP Morgan Investment Management. “Next week is too early for the Fed to cut rates or even clearly signal it, since uncertainty is still very high on the trade and fiscal front, and the labor market has been resilient.”
Traders, meanwhile, have been keeping their expectations for 2025 rate reductions contained as economic uncertainty lingers.
“The Fed can and will probably prefer to wait and see,” said Evelyne Gomez-Liechti, a multi-asset strategist at Mizuho in London.
What Bloomberg’s Strategists Say....
“Traders are getting marginally more confident that the Fed will deliver two rate cuts this year after May’s benign CPI. However, policymakers will need more evidence of inflation staying under control before they commit.”
— Tatiana Darie, Markets Live Strategist, New York
For the full column, click here
Investors’ focus is now shifting toward Treasury Secretary Scott Bessent’s testimony before the House Ways and Means Committee at 10 a.m. New York time. Lawmakers are likely to ask him about trade talks with China, as well as the road ahead for the nation’s economy.
An auction of 10-year Treasuries will also be closely monitored as a test of market sentiment ahead of a hotly anticipated 30-year bond sale on Thursday. Yields on longer-dated debt have climbed since late April amid concern over ballooning government deficits.
The 10-year yield was three basis points lower at 4.44% ahead of the $39 billion auction of the benchmark notes scheduled for 1 p.m. New York time.
This week’s slug of Treasury sales concludes Thursday, with a $22 billion auction of 30-year bonds. The benchmark was lagging the market, with its yield little changed around 4.92%.
“The front end is driven by Fed policy and the back end is driven by other factors, and there is a pesky auction this week, so I expect to see the 30-year cheapen up,” Gregory Peters, co-chief investment officer at PGIM Fixed Income told Bloomberg TV.
--With assistance from Kristine Aquino, Alice Atkins, Naomi Tajitsu, Ye Xie, Edward Bolingbroke and Carter Johnson.
(Adds investor comments, updates yields.)