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Treasury Yields Rise as Fed Rate-Cut Hopes Fade Before CPI

By Elizabeth Stanton
Pedestrians in downtown Atlanta, Georgia, US, on Monday, Sept. 16, 2024. Inflation rates fell under 2% in Atlanta for the first time in almost four years and dropped significantly across the South, providing some relief to consumers, and potential voters, in regions that will be key to the outcome of the US presidential election. Photographer: Elijah Nouvelage/Bloomberg (Elijah Nouvelage/Bloomberg)

(Bloomberg) -- US Treasury yields rose as traders nixed bets on additional Federal Reserve interest-rate cuts this year ahead of inflation data to be released on Thursday.

Ten- and 30-year yields reached the highest levels since late July on Wednesday, peaking after an auction of 10-year notes drew middling demand. The moves held after minutes from the Fed’s latest policy meeting showed a majority of officials backed a half-point rate cut, even though some would’ve preferred a smaller move. 

“There’s fear that maybe the Fed is going to be on pause at the next meeting,” said Bryce Doty, a bond fund manager at Sit Investment Associates. “If employment is strong, the only thing keeping the Fed on track to cut at all is mild CPI.”

Bond traders’ expectations have been trending in that direction, abandoning wagers on a second half-point rate cut in November in reaction to strong September employment data released Friday. Even a quarter-point cut next month is no longer fully priced into swap contracts, and expectations for one reached a new low of about 75% on Wednesday. A quarter-point cut is still viewed as certain by year-end.

The thinking is that Thursday’s September consumer prices data — if it fails to show deceleration — has the potential to batter the chances of more than one quarter-point rate cut this year. 

Dallas Fed President Lorie Logan on Wednesday said the central bank should lower interest rates at a slower pace following its unusually large rate cut last month.

At Sit Investment, Doty views the recent rise in Treasury yields — which he said likely also has technical drivers in the mortgage-backed bond market — as a buying opportunity. 

“If you missed the rally after the Fed cut, here’s your second chance,” he said. “Who thinks six months from now they’re not going to be lowering rates?” 

Wednesday’s 10-year note auction was awarded at a slightly higher-than-anticipated yield of 4.066%, indicative of demand that fell short of expectations. An auction of 30-year bonds is slated for Thursday at 1 p.m. New York time, following the release of the consumer price index report at 8:30 a.m.

©2024 Bloomberg L.P.