US yields fall after inflation data matches expectations

NEW YORK – US Treasury yields declined on Tuesday, after a reading on inflation for December came in as expected and kept intact market expectations for the path of rate cuts from the Federal Reserve this year.

The Labor Department said the Consumer Price Index (CPI) rose 0.3% last month, matching expectations of economists polled by Reuters. In the 12 months through December, the CPI advanced 2.7%, equaling November’s gain and in line with expectations.

The yield on the benchmark US 10-year Treasury note slipped 2.4 basis points to 4.175%.

“It’s more of a relief trade that indeed inflation does not appear to be accelerating and so that lingering concern about inflation being too high and what that means for a host of issues, that’s a concern that persists in the minds of markets and investors,” said Bill Merz, head of capital market research at US Bank Wealth Management in Minneapolis.

“When we have numbers like today’s that alleviate some degree of that tail risk of higher inflation, that’s a constructive sign, and we’re seeing the bond markets have a modest but constructive reaction to that as well.”

The yield on the 30-year bond fell 1.7 basis points to 4.823%.

Expectations for the path of Fed rate cuts were little changed after the data, with markets pricing in only a 2.8% chance of a cut at the central bank’s meeting later this month, down from 4.4% in the prior session, according to CME’s FedWatch Tool. Expectations for a cut of at least 25 basis points at the Fed’s March meeting dipped to 27.4% from 28.7% on Monday.

Markets are currently pricing in roughly 50 basis points of cuts this year, according to LSEG data.

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 63.9 basis points.

Federal Reserve Bank of St. Louis President Alberto Musalem said the Fed is committed to returning inflation to its 2% target and Tuesday’s data was encouraging for views that it will converge more towards that level this year, but there was no near-term reason to cut rates further.

Federal Reserve Bank of Richmond President Tom Barkin is scheduled to speak later in the day.

The two-year US Treasury yield, which typically moves in step with interest rate expectations for the Fed, shed 2.5 basis points to 3.522%.

An auction of USD 22 billion in 30-year bonds was seen as strong by analysts, with above average demand of 2.42 times the bonds on sale. Auctions of USD 58 billion in three-year notes and USD 39 billion in 10-year notes on Monday were also seen as solid by market participants.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.368%, its highest since mid-November.

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

(Reporting by Chuck Mikolajczak; Editing by Susan Fenton and Nick Zieminski)