Treasuries Rally, 10-Year Yield Hits 4.34% as Rate Cut Looms

Treasuries rally on cooling April inflation, sparking trader bets on Fed rate cuts by September.

By Athena Xu

5/15, 09:06 EDT
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Key Takeaway

  • Treasuries rallied with 10-year yields dropping to 4.34%, the lowest in over a month, after April's inflation data showed cooling.
  • Traders now see over an 80% chance of a Fed rate cut by September, adjusting expectations based on the latest inflation report.
  • The market's response was buoyed by the absence of an inflation increase, signaling potential moderation in economic conditions.

Inflation Data Sparks Treasury Rally

Treasuries rallied significantly, with 10-year yields dropping to their lowest in over a month, following the release of US inflation data that indicated a cooling in April for the first time in six months. This data led to a decrease in yields across the board, with 10-year yields falling as much as 10 basis points to 4.34%, and both two-year and five-year yields down about 8 basis points. The market's reaction was buoyed by increased expectations for Federal Reserve interest-rate cuts, with interest-rate swaps showing traders pricing in over an 80% chance of a quarter-point rate cut by the September Fed meeting. David Kelly, chief global strategist at JPMorgan Asset Management, highlighted the moderation of market surprises as a key factor in the market's reaction.

Market Anticipates Fed Rate Cuts

The anticipation of key US price data has led traders to brace for potential deeper and faster interest-rate cuts from the Federal Reserve this year. This sentiment is reflected in the bond market's advance, with Treasury yields falling across the curve. Money markets have fully priced in one quarter-point rate reduction from the Fed this year, likely in September, and see a 62% chance of a second cut. Upcoming producer price data (PPI) and consumer price data (CPI) are expected to show a slowdown in core inflation on an annual basis, which could further influence the Fed's policy direction. However, Fed Governor Michelle Bowman's recent comments suggest a cautious stance from the central bank, emphasizing the need for patience and pointing to persistent price growth.

CPI and PPI Data in Focus

The financial markets are closely watching the release of the April CPI and PPI reports, with expectations set for a slowdown in core inflation. These reports come at a time when inflation rates have consistently exceeded forecasts, contributing to market volatility. A recent survey from the New York Fed showed a spike in US consumer inflation expectations, underscoring the market's sensitivity to inflation data. The outcome of these reports could significantly influence the Fed's policy decisions, with strategists from Societe Generale SA noting the potential for these data points to clarify the current policy fog.

Street Views

  • David Kelly, JPMorgan Asset Management (Neutral on the market):

    "The reason for the market reaction is that we didn’t get an upside surprise. Overall, things are moderating."