US yields slide as markets price in near-certainty of Fed cut in November

NEW YORK – US Treasury yields slipped on Friday after an unchanged producer prices data reading that was trending lower and a consumer-sentiment report maintained chances of an interest-rate cut by the Federal Reserve at next month’s monetary policy meeting.

The Treasuries market is closed on Monday for Columbus Day.

The unchanged reading in the producer price index for final demand last month followed an unrevised 0.2% gain in August, the Labor Department said. Economists polled by Reuters had forecast the PPI edging up 0.1%. In the 12 months through September, the PPI increased 1.8%, after climbing 1.9% in August, more than the expected 1.6% rise.

The data followed news on Thursday that consumer prices rose slightly more than expected in September, lifted by higher food costs. The two reports supported views the Federal Reserve would cut interest rates again by the more standard 25 basis points, after September’s aggressive 50-bps reduction.

Recent US economic data is “creating confusion and will create doubt” as to what the Fed does from here, said Christian Hoffmann, head of fixed income at Thornburg Investment Management in Santa Fe, New Mexico, with USD 46 billion in assets under management.

“The market is still pricing in a high probability that we cut at all because the Fed has built a shrine to data dependence and unless you want to tear that down, the two important data points (the consumer price index and the strong nonfarm payrolls report) that we got make a tough case for cutting at all,” Hoffmann noted.

He pointed out that the labor market “does not feel like it’s falling off a cliff,” and it’s “certainly too soon to declare victory on inflation.”

The fed funds futures have priced in a 91% chance of a 25-bps easing next month, with a 9% probability that the Fed will keep the policy rate in the 4.75%-5.0% target range, according to LSEG calculations.

The futures market also showed about 48 bps of easing this year, down from more than 50 bps early this week. It priced in about 102 bps of Fed cuts in 2025, a steep decline from the roughly 200 bps of reductions estimated prior to last Friday’s blowout US nonfarm payrolls report.

In afternoon trading, the yield on benchmark US 10-year notes was off 2.1 bps from late Thursday at 4.073%. It rose for a fourth-straight week, with gains of 9.6 bps.

A separate survey from the University of Michigan on Friday showed its preliminary consumer sentiment index slipped to 68.9 in October from a final reading of 70.1 in September. Economists had forecast a preliminary reading of 70.8.

Consumers’ 12-month inflation expectations rose to 2.9% from 2.7% last month.

US yield stayed lower after the consumer sentiment data

The US 30-year bond yield was flat at 4.386%, hitting a 10-week high earlier in the session of 4.421% and rising for eight straight days. For the week, it gained 12 bps.

On the short end of the curve, the two-year note yield, which is typically sensitive to Fed policy expectations, fell 5.4 bps to 3.945%, on track for its biggest daily fall since Sept. 27. On the week, the two-year yield has dropped about 6.7 bps.

The yield curve has bull-steepened, with the spread between US two- and 10-year yield at 13.2 bps. In a bull-steepening, short-term rates fall more sharply than those on the long end, suggesting more rate cuts are expected.

(Reporting by Alden Bentley; Editing by Andrea Ricci, Chris Reese and Rod Nickel)