US yields slump as inflation ebbs and Zelenskiy, Trump tussle

NEW YORK – US Treasury yields sank to new multi-month lows on Friday as bonds continued to rally after a report closely tracked by the Federal Reserve showed annual inflation subsided and consumer spending slowed last month.

Financial markets viewed the data as likely keeping the US central bank on track to cut interest rates at least twice this year.

US yields extended their fall as bond prices rose further on safe-haven buying after Ukrainian President Volodymyr Zelenskiy and US President Donald Trump clashed in a meeting on Friday over the Russia-Ukraine war. Yields move inversely to prices.

“Most US investors (and voters) pay attention to what hits the pocketbook closer to home and Russia/Ukraine has been just one of many global considerations on the edges for a very long time,” said Carol Schleif, chief market strategist, at BMO Private Wealth, in Minneapolis.

Yields briefly ticked higher, before soon starting to fall again, after the Commerce Department said its Personal Consumption Expenditures Price Index gained 0.3% last month, matching December’s unrevised 0.3% rise.

In the 12 months through January, the PCE increased 2.5% after climbing 2.6% in December. Both readings were in line with the expectations of economists polled by Reuters and indicated movement toward the Fed’s 2% target.

But the data also showed a consumer spending slowdown, reinforcing signs that the US economy is cooling. Consumer spending, which accounts for more than two-thirds of US economic activity, dropped 0.2% last month after an upwardly revised 0.8% increase in December. Economists polled by Reuters had forecast consumer spending would gain 0.1%.

Weak consumer confidence and soft manufacturing, retail sales, and home sales data in recent weeks sparked a bond rally that pushed yields lower, with investors moving out of stocks into the safety of Treasury markets amid worries about how Trump administration tariff policies will affect growth and inflation.

The Fed paused its policy easing in January after bringing rates down a full percentage point from September to December. The central bank’s policy rate is currently in the 4.25%-4.50% range.

“This week we saw a sharp drop in the yields because people became worried about the growth outlook, which puts the Fed in a bit of a bind. There are signs of growth decelerating, but inflation is not yet where the Fed wants it to be,” said John Lloyd, lead for the Multi-Sector Credit Strategies at Janus Henderson.

In afternoon trading, the benchmark 10-year yield was last at 4.216%, down 6.4 basis points (bps) and near the day’s lows. It bottomed earlier on Friday to 2.212%, its lowest since December 11, after the Zelenskiy-Trump headlines.

On the month, the 10-year yield plunged nearly 35 bps, its largest monthly decline since December 2023.

The two-year yield, which typically moves in step with interest rate expectations, touched its lowest since October 21 of 3.985% in the aftermath of the Trump and Zelenskiy meeting, and was last down 8.5 bps at 3.989%, posting its biggest daily fall since mid-January.

The yield dropped 25 bps for the month of February, its heftiest drop since September last year.

Expectations the Fed will cut rates by at least 25 basis points at its June meeting edged up after the PCE data, with markets pricing in a 75% chance of a cut, up from nearly 70% in the prior sessions, according to CME Group’s FedWatch Tool.

Rate futures are also pricing in 65 basis points of easing this year, or slightly more than two cuts, compared with 60 basis points of rate reductions late on Thursday.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.532%, up from 2.518% on Thursday. The 10-year TIPS breakeven rate was last at 2.373%, slightly higher from 2.361% on Thursday.

(Reporting by Gertrude Chavez-Dreyfuss and Tatiana Bautzer; Editing by Alden Bentley, Chizu Nomiyama, Paul Simao, and Nick Zieminski)