US Treasuries rise as July inflation aligns with forecasts

U.S. Treasury yields declined on Wednesday after July consumer inflation data matched economists’ expectations, reducing immediate pressure on the Federal Reserve to keep interest rates at elevated levels.

The Labor Department reported the Consumer Price Index (CPI) rose 0.2% month-over-month in July, in line with the median forecast in a Reuters poll. On an annual basis, headline CPI increased 3.2%, slightly below June’s 3.3% pace, signaling a modest slowdown in price pressures. Core CPI, which excludes volatile food and energy costs, also rose 0.2% from June and 3.2% year-over-year, matching forecasts.

In response, the yield on the benchmark 10-year Treasury note fell to 4.18%, down from 4.25% late Tuesday. The two-year Treasury yield, more sensitive to Federal Reserve policy shifts, dropped to 4.85% from 4.92% in the prior session. The decline in yields reflects market expectations that the Fed may hold rates steady at its September policy meeting rather than resume tightening.

Traders priced in a 90% probability of no rate hike at the September 19-20 meeting, according to CME Group’s FedWatch tool, up from 80% the previous day. The odds of a quarter-point hike by December fell to 45%, down from 50%. Fed officials have emphasized a data-dependent approach, with Chair Jerome Powell reiterating that policy decisions will hinge on incoming economic data, including inflation and labor market conditions.

The Treasury market’s reaction underscores the sensitivity of short-term rates to inflation trends, particularly as the Fed seeks to balance its fight against inflation with concerns over economic growth. The July CPI report follows a string of data suggesting cooling price pressures, though policymakers have cautioned against declaring victory prematurely.

Investors will now focus on upcoming economic indicators, including producer prices and retail sales, for further signals on the Fed’s next policy move. The central bank’s next Summary of Economic Projections, due at the September meeting, will also provide updated guidance on the trajectory of interest rates and inflation expectations.

For now, the Treasury market’s gains reflect a cautious optimism that inflation is stabilizing without requiring additional monetary tightening, though risks remain tied to labor market resilience and geopolitical developments that could disrupt supply chains.