On Wednesday, U.S. Treasury yields experienced a modest uptick as investors processed the latest inflation data and assessed its implications for the economy and Federal Reserve monetary policy. The yield on the 10-year Treasury note rose by 1 basis point to 3.867%, while the 2-year Treasury yield increased by over 4 basis points, reaching 3.991%. In the bond market, yields and prices move inversely, with each basis point representing 0.01% in yield.
This slight rise in yields follows the release of July’s consumer price index (CPI) data, which aligned closely with Wall Street’s expectations. The CPI increased by 0.2% month-over-month, consistent with forecasts from economists surveyed by Dow Jones. Over the past year, the CPI rose by 2.9%, marginally below the anticipated 3.0% increase. The core CPI, which excludes volatile food and energy prices, also rose by 0.2% on a monthly basis and showed a 3.2% increase year-over-year, meeting expectations.
The stability in inflation data is seen as giving the Federal Reserve room to consider cutting interest rates at its upcoming meeting on September 17-18. The central bank’s benchmark federal funds rate is currently set between 5.25% and 5.50%. Bryce Doty, a senior portfolio manager at Sit Investment Associates, commented that the current inflation data supports the Fed’s potential move to cut rates. He noted, “This gives the Fed the ability to cut while making the case that a high real fed funds rate is restrictive and supportive of bringing inflation down further.”
Doty also mentioned that the yield curve, which plots yields across different maturities, could continue to normalize as inflation pressures ease. Currently, short-term yields exceed long-term yields, a condition known as an inverted yield curve. Doty suggested that investors might find value in the 3- to 6-year segment of the yield curve as the economic outlook evolves.
The CPI data follows a less-than-expected rise in producer prices, which are a measure of inflation at the wholesale level. July’s Producer Price Index (PPI) increased by 0.1% on a monthly basis, falling short of the forecasted 0.2% rise. This data further reinforces the idea that inflation pressures are moderating, contributing to the growing consensus that the Fed may opt for a rate cut in September.
Market expectations are currently leaning towards a 100% probability of a rate cut in September, according to CME Group’s FedWatch tool. However, there is some uncertainty regarding the magnitude of the cut, with the market split between a reduction of 25 basis points or 50 basis points.
Overall, the latest inflation reports are strengthening the likelihood of a rate cut by the Federal Reserve, while investors are shifting their focus from rising prices to concerns about slowing economic growth. The bond market’s reaction, with slight increases in Treasury yields, reflects this cautious optimism as investors adjust their expectations for future monetary policy actions.