Treasuries rose, led by short-dated notes, after a reading on wholesale inflation came in weaker than expected, cementing bets that the Federal Reserve will start to cut interest rates next week.
The yield on two-year notes, which closely track expected moves by the Fed, fell as much as four basis points to 3.52%, while the rate on benchmark 10-year notes moved three basis points lower to 4.06%.
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The producer price index for August decreased 0.1% from a month earlier, according to a Bureau of Labor Statistics report out Wednesday. It was the first drop in four months.
“This makes next week a slam dunk for a 25 basis point Fed cut,” said Andrew Brenner, head of international fixed income at NatAlliance Securities.
President Donald Trump seized on the surprise report, calling for Fed Chair Jerome Powell to lower rates.
Traders have fully priced in a quarter-point reduction at next week’s meeting, and mostly priced in additional cuts of the same size in October and December.
A report on consumer prices in August on Thursday will carry more weight with policymakers, however. Core consumer prices — excluding food and energy — likely rose at an annualized 3.1% rate, well above the central bank’s 2% inflation target.
“The market will be somewhat cautious about taking [the rally] too far however with CPI ahead,” said John Briggs, head of US rates strategy at Natixis North America.
Treasuries got a boost last week when the August employment report showed that job creation fell short of estimates, the latest in a string of soft labor-market indicators.
“The market is pretty convinced the Fed’s going to lean into weakness on the employment side of its mandate and start easing next week,” said Angelo Manolatos, an interest-rate strategist at Wells Fargo Securities. “Inflation data is probably not going to derail a move in September or even October but it can be more impactful beyond that.”
