US Treasury yields decline as Fed-cut expectations firm

NEW YORK – US Treasury yields dipped on Wednesday, with the benchmark 10-year note yield down for a third-straight session as investors dialed in expectations for the path of interest rates ahead of data on consumer strength.

The 10-year yield had risen four straight weeks, reaching 4.12% last week, its highest since July 31, in the wake of a strong payrolls report that diminished expectations for another outsized rate cut of 50 basis points from the Fed at its November policy meeting.

Labor Department data on Wednesday showed import prices slipped 0.4% last month, the biggest drop since December 2023, after a revised 0.2% decrease in August, amid a sharp decrease in the cost of energy products and indicating a benign inflation outlook that keeps the Fed on course to continue cutting interest rates.

The data comes ahead of retail sales figures on Thursday that will provide insight on the health of the consumer.

“Most likely if they come around expectations, it’s supportive of a still resilient and strong consumer, so not pointing to the need for super-fast rate cuts,” said JoAnne Bianco, BondBloxx partner and client portfolio manager in Chicago.

“We translate this into our view of where we think value is in the markets and we think the backup in yields that we’ve seen really has represented an opportunity for investors to increase their allocation to fixed income.”

Markets are now pricing in a 94.2% chance for a cut of 25 bps at the Fed’s next meeting, with only a 5.8% chance the central bank will hold rates steady, according to CME’s Fedwatch Tool. Expectations for a 50-bps cut were at 29.3% a month ago.

The yield on the benchmark US 10-year Treasury note fell 2.6 basis points to 4.012% after dipping to 3.995%, its lowest since Oct. 7.

Comments from Fed officials, including Chair Jerome Powell, have signaled a shift in focus from combating inflation to labor-market stability while also being deliberate in the path of future rate cuts.

The yield on the 30-year Treasury bond slipped 3.3 basis points to 4.295%.

Atlanta Federal Reserve President Raphael Bostic said late on Tuesday he penciled in just one more interest-rate reduction of 25 basis points this year when he updated his projections for September’s US central bank meeting.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 7.7 basis points.

The two-year US Treasury yield, which typically moves in step with interest-rate expectations, lost 2.3 basis points to 3.933%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities was last at 2.219% after closing at 2.226% on Oct. 15.

The 10-year TIPS breakeven rate was last at 2.273%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Andrea Ricci and Rod Nickel)