(Bloomberg) -- US Treasuries jumped and investors priced in higher expectations that the Federal Reserve will lower interest rates three times in 2026 after a reading of US inflation came in below forecasts.

The moves on Friday pushed yields on two-year notes — which are most sensitive to the central bank’s policy changes — lower by as much as six basis points to 3.40%, the lowest since October, before paring. Traders priced in roughly 63 basis points worth of easing for the year after the data, equivalent to around 50% odds of a third quarter-point rate reduction by December. They’d been pricing in 58 basis points for this year as of Thursday.

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“This morning’s inflation print, even in-line with consensus expectations, was pretty encouraging under the surface,” Tiffany Wilding, economist at Pacific Investment Management Co., said on Bloomberg Television. “You should have a Federal Reserve that feels more comfortable cutting interest rates. Getting a couple more cuts in couple more cuts in this year seems reasonable to us.”

The core consumer price index, which excludes often-volatile food and energy costs, increased 0.3% from December, the most since August, according to Bureau of Labor Statistics data out Friday. The data arrived two days after delayed monthly employment data revealed solid hiring and a surprise drop in the unemployment rate in January. Haven demand amid a selloff in the equity market, however, buoyed Treasuries on Thursday.

In response to the January jobs data, traders had ceased earlier this week to fully price in a quarter-point rate move by mid-year, shifting that wager to July. Wall Street banks that had forecasts for a cut in March pushed them to later in 2026.

The Fed cut interest rates three times at the end of last year in response to signs of weakness in the labor market, then held them steady at the most recent meeting. Several policymakers opposed the last rate cut in December and have said inflation remains too high to lower rates further.

On Friday, the initial reaction in the Treasury market Friday faded as focus shifted toward the broader takeaways from the week’s data releases. Yields were lower by one to two basis points across maturities by 9 a.m. New York time.

“Lack of a meaningful surprise likely keeps the Fed focused on the labor market,” Aroop Chatterjee, managing director at Wells Fargo Securities, said. “The market may be overestimating the likelihood of Fed cuts this year.”

--With assistance from Kristine Aquino and Miles J. Herszenhorn.

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