Yields slide lower in good news for mortgage rates
US Treasury yields fell on Wednesday following a combination of softer inflation data and robust investor demand at a 10-year bond auction, signaling increased confidence in the potential for Federal Reserve rate cuts later this year.
Yields declined across maturities, with the most notable moves occurring after the release of May’s Consumer Price Index (CPI) report, which showed core inflation rose less than expected for a fourth consecutive month. The inflation figures reinforced market expectations that the Fed may ease interest rates before the end of 2025.
10-year auction draws strong investor interest
The rally intensified following the $39 billion sale of 10-year notes. The bonds were awarded at a yield of 4.421%, slightly below market expectations, highlighting investor willingness to accept lower returns. More than 90% of the auction was absorbed by non-dealer buyers, reflecting what analysts described as “strong end-user demand.”
“At this point it seems like concerns about demand are focused on the very long end of the curve,” said Zachary Griffiths, head of macroeconomic strategy at CreditSights, told Bloomberg. He noted that while the 10-year results were strong, attention now shifts to Thursday’s $22 billion auction of 30-year bonds.
The CPI report prompted a shift in market expectations. Traders now price in about 47 basis points of Fed rate reductions this year, compared with 42 basis points a day earlier. The likelihood of a September rate cut rose to roughly 75%, while a second cut by year-end is viewed as increasingly plausible.
“It’s a clean downside surprise and not just in the headline,” said Haris Khurshid, chief investment officer at Karobaar Capital. “The breadth of the softening gives the Fed real cover.”
Focus turns to 30-year bond sale
Despite declining yields, the longer end of the curve remains elevated. Thirty-year bonds are still yielding around 4.90%, approximately 10 basis points higher than at the start of the year, due to concerns over expanding US budget deficits.
Federal Reserve officials have held the benchmark rate steady at 4.25%–4.5% since December. While a rate change is not anticipated at next week’s policy meeting, the recent inflation data may allow the Fed to maintain its forecast for two cuts in 2025, Bloomberg noted.
Priya Misra of JP Morgan Investment Management said the CPI results reduce the risk of a more aggressive stance. “The dots will be interesting as it signals the Fed’s reaction function, and the CPI data should curtail some of the hawkish risks and probably lowers the hurdle to signal the easing bias,” she said.
Market analysts remain cautious, citing fiscal uncertainty and a resilient labor market as key factors that may delay any definitive easing signal.
What are your thoughts on the recent analysis? Share your insights below.
