US Short-Term Treasuries Gain as Traders Boosts Rate-Cut Bets.

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US Short-Term Treasuries Gain as Traders Boosts Rate-Cut Bets

treasuries & bonds :: 2025-08-13 :: source - bloomberg

By Michael Mackenzie and Ye Xie

(Bloomberg) -- Short-term Treasuries rallied following a mostly benign report on US inflation that prompted traders to boost expectations the Federal Reserve will cut interest rates next month.

The rally pushed yields on two-year notes — which are more sensitive to changes in monetary policy — down by four basis points Tuesday afternoon to 3.73%. And swap traders priced in nearly 90% odds of a Fed rate cut on Sept. 17, up from about 80% before the data.

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Rising yields in UK and euro-zone debt markets — including the highest German 30-year yield since 2011 — contributed to weakness in longer-term Treasuries after the inflation report.

The core consumer price index, which excludes food and energy, increased 0.3% from June, according to the Bureau of Labor Statistics. That was in line with economists’ forecasts, as was the overall CPI on a monthly basis.

“Maybe just avoiding upside surprises on inflation is enough for the market to continue pricing in more rate cuts,” said Zachary Griffiths, head of investment-grade and macroeconomic strategy at CreditSights. “We view this print neutral, but still think the Fed will cut in September,” probably by half a percentage point “as the labor market has become the focal point for policymakers.”

Weak July employment data released Aug. 1 sparked the bond market’s biggest gain this year.

Longer-dated Treasury yields were higher by about three after erasing declines sparked by the inflation data. The 30-year bond’s rose nearly to 4.89%

The overall annual inflation rate was unchanged at 2.7% while the core annual rate, which excludes food and energy, increased more than anticipated to 3.1%. The dollar weakened against a basket of peers after the data.

“It feels like the market was worried about a worse number” that could have put the brakes on Fed rate cuts, said John Briggs, head of US rates strategy at Natixis North America.

What Bloomberg Strategists Say...

“The inflation numbers released this morning support the prevailing narrative that the Federal Reserve is likely to cut in September and at least one more time in 2025 to ensure a soft landing. Still, the steepening yield curve shows that inflation and deficit worries persist.”

—Edward Harrison, Macro Strategist, Markets Live

For the full analysis, click here.

Positioning ahead of the CPI report included continued buying of an options position that would benefit from a half-point Fed rate cut in September. The Fed usually moves interest rates in quarter-point increments, though its three late-2024 rate cuts began with a half-point move in September.

The core CPI trend “is a bit problematic for the Fed,” said Tom di Galoma, managing director at Mischler Financial Group. While a quarter-point cut in September is likely, additional moves will depend on subsequent inflation readings, he said.

Treasury yields approached the low end of their range since late April after the July jobs report, and Fed policy makers will see August employment data before making their September decision.

“The jobs rally took all the air out of the bond market rally potential until Jackson Hole at least,” said George Goncalves, head of US macro strategy at MUFG.

Powell is slated to speak next week at the Fed’s annual symposium in Jackson Hole, Wyoming, and may use the opportunity to shed light on any change in his view that inflation risk tied to tariffs the Trump administration has instituted this year warrants caution in lowering rates.

Speaking Tuesday, Kansas City Fed President Jeff Schmid said he favors keeping interest rates on hold for the time being to prevent robust economic activity from adding to inflation pressures, and Richmond Fed President Tom Barkin said it’s still unclear whether the central bank should concentrate more on controlling inflation or bolstering the job market.

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.

(Updates pricing throughout.)