Benchmark U.S. Treasury yields fell on Tuesday as investors scaled back expectations for aggressive Federal Reserve interest-rate hikes following softer inflation data.
The yield on the 10-year Treasury note dropped below 4.5%, extending a decline from recent highs as market pricing reflected reduced odds of a 50-basis-point hike at the Fed's next policy meeting. The shift came after a report showed U.S. consumer prices rose less than forecast in April, reinforcing bets that the central bank may pause or slow its tightening cycle.
The 2-year yield, which is more sensitive to policy expectations, also declined, trading near 4.85% after earlier approaching 5%. The gap between the 2-year and 10-year yields—a closely watched indicator of economic outlook—narrowed further, reflecting growing caution among traders about the near-term path of borrowing costs.
European government bond yields followed suit, with German 10-year Bund yields slipping below 2.5% as investors reassessed the European Central Bank's policy trajectory. The ECB has signaled plans to raise rates again in June, but market pricing suggests a more measured approach than previously anticipated.
In currency markets, the U.S. dollar edged lower against major peers, with the dollar index dipping 0.2% to 104.10. The euro gained ground against the greenback, while the Japanese yen remained under pressure amid persistent speculation over further Bank of Japan policy adjustments.
Analysts noted that the shift in market sentiment underscores the growing influence of incoming economic data on Fed policy bets. "The inflation print has clearly shifted the narrative," said a strategist at a major bank. "Investors are now pricing in a more dovish Fed, even if officials have not yet signaled a pause."
The repricing of rate expectations comes as central banks globally grapple with balancing inflation control against growth risks. While some policymakers continue to emphasize the need for further tightening, market dynamics suggest a growing consensus that the peak of the current hiking cycle may be approaching.
