US government bonds surged as benign inflation data prompted traders to resume their bets on additional Federal Reserve interest rate cuts by July.
The rally lowered yields by 15 basis points on notes maturing in five to seven years. It erased most of the remaining increase in yields since Friday, when strong December employment data sowed doubts that the Fed would cut rates at all this year.
The benchmark 10-year note’s yield declined as much as 14.5 basis points to 4.65%, the lowest level since Jan. 9, the day before the jobs data. It peaked at nearly 4.81% on Tuesday.
“The report gives support to those in the market and at the Fed that the next move by the Fed is still to ease rates,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “Given that inflation is the critical variable, it probably means 10s can start to consolidate between 4.50% and 4.80% for a while.”
Leading into the data, flows in the options market signaled doubts about a continued selloff in Treasuries as traders looked to hedge a drop in yields. One notable trade targeted a 10-year level back to around 4.6%, paying a premium of approximately $45 million on the position. Following the release, the position had flipped to a mark-to-market value of approximately $63 million. Meanwhile, an options play that traded less than 30 minutes before the print doubled in value following the post-data price action.
The Treasury moves saw the US join a solid rally for government bonds in the UK and Europe. The yield on 10-year gilts fell 16 basis points to 4.74%, the most since 2023, after a soft inflation reading last month eased fears over persistent price pressures in Britain. A number of euro-zone 10-year benchmarks were lower by at least 10 basis points.
US bond investors were emboldened by underlying US consumer inflation that rose 3.2% in December after a forecast of a 3.3% increase from a year earlier, said John Brady, managing director at RJ O’Brien.
Overall, the market increased its cumulative expectations for rate cuts for 2025 to around 38 basis points. The broader consumer price index met forecasts as it ran at a 2.9% pace in December from a year earlier.
The rally in Treasuries halts a recent selloff, which has seen yields — especially in long-dated securities — challenge key levels around 5%. In the lead-up to the data release, traders had also been paring back their expectations for rate cuts this year amid signs of firmer US growth and the prospect of inflationary trade policies under President-elect Donald Trump, who takes office next week.
The CPI data “strengthens the case that the Fed’s cutting cycle has not yet run its course,” Tina Adatia, head of fixed-income client portfolio management at Goldman Sachs Asset Management, said in a note. However, a robust jobs market means “the Fed has scope to be patient and more good inflation data will be required for the Fed to deliver further easing.”
Traders will turn to focus on Trump’s inauguration on Jan. 20, when US markets will be closed for a public holiday. Bond investors have been apprehensive about Trump’s impact on inflation, which remains above the Fed’s target of 2%. That has helped propel yields to fresh highs earlier this week.
“I don’t know how much more we can push Trump policy shocks before we get eyeballs on some details,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investment.
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