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US Treasuries Rally as July Inflation Data Boosts Rate-Cut Bets

(Bloomberg) -- Treasuries gained and traders boosted expectations for the Federal Reserve to lower interest rates in September after a report on consumer-price inflation came in mostly in line with forecasts.

Yields tumbled, with the two-year maturity leading the way, dropping five basis points to about 3.72%. Traders added to wagers on rate cuts by year-end and were pricing in nearly a 90% chance of a quarter-point reduction when the next meeting concludes Sept. 17. All told, the market expects more than 0.6 percentage point of easing by the end of December.

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The consumer price index in July was slightly lower than expected on an annual basis at 2.7%, while the core measure, which excludes food and energy, proved hotter than anticipated, edging up to 3.1%.

The dollar tumbled against a basket of peers following the release of the data. The report followed a weaker-than-projected job-market report for July, which had already boosted bets on a September Fed cut.

“The magnitude of cuts will rely more on the labor part of the Fed’s mandate with markets waiting on further growth data,” said Molly Brooks, US rates strategist at TD Securities.

The post-CPI rally in Treasuries reflected a degree of relief that inflation remained contained. Market positioning ahead of CPI showed continued buying in an options position that would benefit from a half-point reduction at the September meeting.

“The market was braced for the pass-through effect of tariffs, a bit misplaced as the tariff impact lies ahead not behind us,” said George Goncalves, head of US macro strategy at MUFG. “And the categories that drifted up the numbers a bit were in non-tariff related categories like airlines and medical services.”

The risk of rising prices from US tariffs remains paramount for Fed Chair Jerome Powell, and some on Wall Street. Sticky inflation would temper the Fed’s ability to ease rates toward the 3% area being priced by swaps over the next 12 months.

So far this month, Treasury yields have fallen toward the lower end of a range dating from late April and that is likely to prevail, with another round of employment and inflation data looming next month before the mid-September meeting. Powell also speaks next week at the annual Fed symposium held in Jackson Hole, Wyoming, and traders will watch for any shift in his view that labor was “in balance” after last month’s Fed meeting.

After the Fed held rates steady last month, Powell reiterated that officials needed more time to gauge the impact of tariffs before cutting rates, signaling patience in the face of President Donald Trump’s relentless pressure on him to lower borrowing costs. Other Fed officials have indicated a willingness to ease rates, with Governors Christopher Waller and Michelle Bowman — both appointed by Trump — dissenting from last month’s decision to keep policy steady, and citing concerns over a slowing jobs sector.

“The market interpretation is that this doesn’t stop the Fed from moving toward cuts,” said Dan Carter, portfolio manager at Fort Washington Investment Advisors.