After November's CPI Report, Treasury Yields Drop in Anticipation of a December Rate Cut

U.S. government bonds rallied on Wednesday morning, leading to a decline in most yields after the release of November’s consumer-price index (CPI), which aligned with expectations. The data strengthened the likelihood of another Federal Reserve rate cut in the upcoming week.

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Market Movements

The yield on the 2-year Treasury fell by 4.2 basis points to 4.105%, down from 4.147% on Tuesday. Treasury yields move inversely to their prices. Similarly, the yield on the benchmark 10-year Treasury note decreased to 4.205%, a drop of 1.4 basis points from the previous session’s 4.219%. Meanwhile, the 30-year Treasury yield remained relatively steady, ticking up slightly to 4.411% from 4.405% on Tuesday.

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Wednesday’s CPI report revealed that November inflation figures largely met expectations. Both overall and core inflation increased by 0.3% on a monthly basis, in line with economists’ forecasts compiled by The Wall Street Journal. Annual headline inflation accelerated to 2.7%, while the year-over-year core inflation rate held steady at 3.3%. These figures confirmed market expectations and pointed to a steady inflation trajectory.

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The CPI results solidified market bets that the Federal Reserve will proceed with a quarter-point interest rate reduction next Wednesday. According to data from LSEG, the implied probability of this rate cut surged to 96.6%.

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Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, noted that the CPI results provided no surprises and reinforced expectations for a December rate cut. "For now, the Fed should stay on track to lower rates again this month," Zentner said. However, she cautioned that the outlook for next year could become more complicated. Factors such as potential tariffs and other policy uncertainties from the Trump administration may affect the Fed's decision-making process in 2025.

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Zentner highlighted that market participants are already adjusting their expectations for the Fed’s monetary policy trajectory. Some now anticipate that the central bank may scale back the number of rate cuts previously projected for 2025, with the possibility of pausing rate reductions as early as January.

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The CPI report and the Federal Reserve’s anticipated actions reflect a complex balancing act in the economy. While inflation appears to be under control, external factors such as geopolitical risks and trade policies could influence future monetary policy. For now, the bond market is pricing in a favorable environment for rate cuts, but the medium- to long-term outlook remains uncertain.

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The decline in Treasury yields underscores investor confidence that the Federal Reserve will remain accommodative in the short term, aiming to support economic growth while keeping inflation near its target. However, the evolving policy landscape may introduce volatility as markets react to new data and shifts in the Fed’s strategy.

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As the Federal Reserve prepares for its final meeting of the year, the focus will remain on its assessment of economic conditions and the potential path for interest rates in 2024 and beyond. For now, Wednesday’s bond market rally and the CPI data signal a momentary alignment between market expectations and the Fed’s policy approach.

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