US Treasuries surged as easing US consumer inflation prompted traders to increase their 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 US 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 seven basis points to 3.95%.
Traders priced in 48 basis points of Fed easing before 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.
“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.
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 Fed 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 as policymakers gather next week.
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.
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.
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