Treasury yields bounce off 2024 lows after August CPI inflation report

By Vivien Lou Chen

Treasury yields rose from their lowest levels of the year after Wednesday's data showed a key component of the August consumer-price index coming in higher than expected, reducing the likelihood of a big interest-rate cut by the Federal Reserve next week.

What happened

The yield on the 2-year Treasury BX:TMUBMUSD02Y rose 3.5 basis points to 3.643%, from 3.608% on Tuesday. Tuesday's closing level was the lowest since Sept. 12, 2022. The yield on the 10-year Treasury BX:TMUBMUSD10Y advanced 1 basis point to 3.653%, from 3.643% on Tuesday. Tuesday's closing level was the lowest since June 1, 2023.The yield on the 30-year Treasury BX:TMUBMUSD30Y rose less than 1 basis point to 3.963%, from 3.954% on Tuesday. Tuesday's closing level was the lowest since Dec. 27.Wednesday's closing levels for 2-, 10- and 30-year yields were the second-lowest of 2024, according to Dow Jones Market Data.

What drove markets

In data released on Wednesday, the monthly core rate of inflation from the August CPI report came in higher than expected, at 0.3% versus economists' median estimate of 0.2%.That higher-than-expected rate was seen as enough to derail the chance of a larger-than-usual, 50-basis-point rate cut from the Fed next Wednesday. Fed-funds futures traders saw an 87% chance of a regular 25-basis-point reduction from the current range of 5.25% to 5.50%, according to the CME FedWatch Tool. The chance of a 50-basis-point move fell to 13% from 34% a day ago.However, traders continued to mostly expect at least 100 basis points of easing by year-end, an indication that some jitters about a steeper-than-expected U.S. economic slowdown remained in place.Read: The stock market was unsettled by CPI report. Investors may fear a Fed mistake.

Treasury's $39 billion auction of 10-year notes Wednesday afternoon was met with above-average bidding by nondealers, according to BMO Capital Markets strategist Vail Hartman.

What strategists are saying

"The CPI report suggests the Fed begins its easing policy with 25 basis points rather than a hoped-for 50 basis points. The reaction in the 10-year Treasury yield, as it inched higher, underscores that the bond market, where yields have been edging lower, agrees," said Quincy Krosby, chief global strategist for LPL Financial in Charlotte, N.C."Today's print should assuage markets that deflation caused by an economic scare has been avoided, at least for now," Krosby wrote in an email. "Accordingly, markets continue to price in a 25-basis-point rate cut on Sept. 18."

-Vivien Lou Chen

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09-11-24 1543ET

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