Treasuries Gain as Key Fed Inflation Figures Trail Estimates

US Treasuries gained after a closely watched batch of inflation data came in below expectations, leading traders to lift the outlook for Federal Reserve interest-rate reductions next year.

The policy-sensitive two-year Treasury yield fell about 6 basis points to 4.26%, and the benchmark 10-year rate dropped a similar amount to 4.5%. That left the yield curve close to the steepest since 2022.

The Friday data showed that in November the core personal consumption expenditures price index, the Fed’s preferred measure of underlying inflation, increased 0.1% from October and 2.8% from a year earlier — both levels slightly below consensus forecasts.

Swaps traders are pricing in about 41 basis points of total Fed cuts next year, roughly 2 basis points more than before the data. That implies less than two full quarter-point reductions.

“We are anticipating more cuts from the Fed next year,” Subadra Rajappa, head of US rates strategy at Societe Generale, said on Bloomberg Television. She said the firm’s economists expect four quarter-point Fed cuts next year.

“The way the economy is going you should see a moderation in growth, you should see a moderation in employment, you should see a moderation in inflation,” she said.