Treasury yields climb, inflation data hits expectations of a sharp rate cut by the Federal Reserve

Treasury yields rose on Wednesday after August data showed consumer prices edged higher but core inflation remained sticky, dampening expectations of a sharp interest rate cut by the Federal Reserve next week.

Treasury yields jumped after the data and traders reduced bets that the Federal Reserve would cut rates by 50 basis points at its September 17-18 rate-setting meeting.

foreign exchange trading platformTorren, managing director of rates sales and trading, said: "Core (CPI) was up 0.3% and that shook the market." He said: "It hit the possibility of a 50 basis point cut in September; I don't think it's an option now for sure, and hit the possibility of a 50 basis point cut for the rest of the year, although we'll see a lot of data later."

(One-hour chart of U.S. Treasury yields)

Yields then fell, probably due to some low buying activity, but eventually rose. "Some people are still not going long, they're always trying to take advantage when the market sells," said John Madziyire, head of Treasuries and Inflation Protected Securities (TIPS) at Navigator Group.

Late Wednesday, CME data showed that traders were mostly betting on a 25 basis point cut next week, putting the likelihood of a 50 basis point cut at 13 percent, down from about 34 percent on Tuesday.

Previously, the rise in Treasury prices on Tuesday caused the yield on the 10-year Treasury note to hit its lowest since June 2023 and the yield on the two-year Treasury note to hit its lowest since September 2022.

Some analysts said this was in part a reaction to Tuesday night's US presidential debate, in which Democratic vice-president Harris is widely seen as dominating the debate with Republican former president Donald Trump, prompting betting markets to believe her chances of winning in November have increased.

"Yields fell slightly overnight, with a stabilizing theme emerging after the Harris/Trump debate," Monterey Capital Markets rates strategists wrote in a note. "From the perspective of the U.S. interest rate market, there was nothing in the debate that triggered nervousness about rising inflation or concerns about indigestion of the Treasury supply."

The emergence of Harris as the Democratic nominee after President Biden withdrew from the race in July prompted a reversal in bond trading on expectations that Mr. Trump would be elected for a second time. Those expectations had led to higher Treasury yields on expectations of higher inflation and a widening budget deficit under Mr. Trump.

The yield on the 10-year note closed Wednesday at 3.655 per cent, up one basis point from Tuesday, while the yield on the two-year note, which better reflects changes in monetary policy expectations, was 3.645 per cent, up about three basis points from Tuesday.