Treasuries fell despite evidence of cooler-than-expected US inflation as the data ignited a rebound in stock prices that eroded demand for bonds.
The two-year yield, reflecting expectations for Federal Reserve monetary policy, declined as much as four basis points to a session low 3.90%, then swiftly rebounded to 4%. The 10-year yield also whipsawed before rising to 4.32%. The S&P 500 Index, meanwhile, surged more than 1%.
“The bond market has been trading much with more in line with equities,” said Subadra Rajappa, head of US rates strategy at Societe Generale. “It’s a good report from the Fed’s perspective. Lower inflation would allow the Fed to react to any weakness in data,” which is good for risky assets.
Traders are still fully pricing in the first quarter-point interest-rate cut of the year in June, with about 67 basis points of easing seen for all of 2025. On Wednesday, Bureau of Labor Statistics data showed the consumer price index increased 0.2% after a sharp 0.5% advance in January. Excluding the often-volatile food and energy categories, the so-called core measure rose 0.2% as well.
Treasuries have been rallying in recent day amid a rout in the equity market that forced money managers to seek shelter in haven assets. Anxiety has been building that President Donald Trump’s policies — including on-and-off-again tariffs — will test the resilience of US consumers and the broader economy.
“Looking back, it is good news; looking forward, there is very little information” in the inflation data, said Mohamed El-Erian, president of Queens’ College, Cambridge and a Bloomberg Opinion columnist, said on Bloomberg Television. “We don’t know what the pass-through of expected and actual tariffs will be.”
Ten-year Treasury yields have fallen more than 50 basis points since peaking in mid-January as recession angst grew.
Given how much the bond markets have already rallied, the CPI data “isn’t enough to get more long duration,” George Goncalves, head of US macro strategy at MUFG. The broad market tone suggests a reticence among traders “to get long after such a big, multi-week move that has likely changed the positioning profile.”
In the options and futures markets, traders have been ramping up bets Fed officials will have to slash rates more than expected this year, piling into call options on two-year Treasuries that will profit in that scenario. The premium on these bullish bets has risen to the highest since last September, when slowing job growth was feeding fears of a slowdown during the final months of Joe Biden’s presidency.
After the CPI report, trading included a couple of large block sales in the Treasury futures market, involving five-year and Ultra 10-year note contracts, adding to the pressure seen on cash yields.
The action in Treasuries increased the expected yield for Wednesday’s auction of 10-year Treasury notes at 1 p.m. New York time. The auction is a reopening, meaning it increases the size of the newest 10-year note, created via an auction last month.
In pre-auction trading, the yield for the $39 billion reopening was around 4.31%, near the high end of its range since it was announced last week. The low end of the range was 4.15%, reached Tuesday as US equity index futures tumbled.
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