Bond Market Adds to Fed Rate-Cut Bets Despite Inflation Uptick

Bond traders shrugged off higher-than-anticipated inflation readings for December, pricing in a larger total amount of Federal Reserve interest-rate cuts this year beginning in May.

While yields surged immediately after the consumer price index showed prices rose more than economists expected, the moves were sustained only until an auction of 30-year bonds cleared the market several hours later. In US afternoon trading, swap contracts that anticipate what the interest rate targeted by the Fed will be in the future repriced to lower levels.

The two-year Treasury note’s yield, more sensitive than longer maturities to Fed moves, declined as much as 10 basis points to 4.26%, the lowest level so far this year. The benchmark 10-year note’s yield fell about 5 basis points to 3.98%.

“There is a broader recognition that rates are moving lower this year and, while there is still going to be volatility, getting exposure to Treasury yields at 4% is attractive,” said Sinead Colton Grant, chief investment officer at BNY Mellon Wealth Management.

Treasury 2 Year Note's Yield Whipsaws After CPI Readings

The longest-dated Treasury yields remained elevated ahead of the auction of 30-year bonds at 1 p.m. New York time, leading to a steeper yield curve. After the auction produced near-average demand metrics despite offering the lowest yield since August, yields in the 30-year sector and curve spreads retreated from session highs.