The 10-year Treasury Yield Rises From 15-month Lows as Traders Await the Inflation Report

Yields on U.S. government bonds showed little movement Tuesday morning, remaining mostly unchanged to slightly lower. Investors were in a holding pattern as they awaited the upcoming release of a key economic indicator—the U.S. Consumer Price Index (CPI) report for August, which is expected on Wednesday.

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Key Developments in Treasury Yields

• 2-Year Treasury Yield: The yield on the 2-year Treasury note fell marginally, dropping less than 1 basis point to 3.657% from 3.666% on Monday.
• 10-Year Treasury Yield: The yield on the benchmark 10-year Treasury dipped slightly to 3.696% from 3.698%, which marks the lowest closing level since June 5, 2023.
• 30-Year Treasury Yield: The yield on the 30-year Treasury bond edged up slightly, rising less than 1 basis point to 4.004%, compared to 3.998% on Monday.\

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Market Drivers

The primary focus for traders and investors is the consumer-price inflation data for August, set to be released Wednesday. This report is critical in providing insight into the Federal Reserve's next steps on monetary policy. In particular, the data will help determine whether the central bank will begin lowering borrowing costs at its upcoming policy meeting.

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According to analysts at Evercore ISI, led by strategist Julian Emanuel, the CPI report holds significant weight in shaping the Fed's decision on rate cuts. They described it as an "open secret" that the possibility of a 50-basis-point cut in the Fed’s benchmark rate remains on the table. However, the prevailing expectation is for a smaller 25-basis-point cut, depending on the CPI figures. If inflation comes in above the anticipated 0.2% month-on-month increase, the likelihood of a 50-basis-point cut diminishes, and a more modest 25-basis-point reduction is expected.

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As of Tuesday morning, traders in the fed-funds futures market were assigning a 71% chance that the Federal Reserve will opt for a 25-basis-point cut at its meeting on September 18, which would bring the target range down from the current 5.25% to 5.5%. The possibility of a more aggressive 50-basis-point cut is seen as less likely, with market odds pricing it at around 29%.

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The 10-year Treasury yield’s recent dip reflects growing sentiment that a slowdown in the U.S. economy will help contain inflation. This, in turn, could encourage the Fed to embark on a cycle of interest-rate cuts starting in September. The subdued inflation outlook, coupled with softer economic data, has led to speculation that the Fed might reduce rates sooner rather than later to support the economy.

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Aside from inflation data, another factor contributing to the cautious mood in the bond market is the upcoming U.S. presidential debate, which will take place Tuesday evening. Vice President Kamala Harris and former President Donald Trump are set to face off, and the political uncertainty surrounding a close election race may influence the Federal Reserve’s decision-making. Should the election create prolonged uncertainty, it could prompt the central bank to hold off on making significant rate cuts until the political landscape becomes clearer.

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A drawn-out election could result in economic and financial market instability, which may impact the Fed's approach to interest rates in the coming months. The central bank might take a more conservative stance by waiting for clarity on the political front before implementing substantial changes to borrowing costs.

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Later on Tuesday, another potential market mover is the scheduled auction of $58 billion in 3-year Treasury notes, with results expected to be announced shortly after 1 p.m. Eastern time. The auction is part of the government’s ongoing efforts to raise capital, and the demand for these notes will provide a snapshot of investor sentiment. Strong demand could signal that investors remain confident in U.S. government debt as a safe haven, while weaker demand might suggest concerns over the economic outlook.

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As markets await the release of the August CPI report, U.S. Treasury yields remained relatively steady. Investors are closely watching the inflation data, which will provide a clearer picture of the Federal Reserve’s next move on interest rates. The bond market is signaling expectations for a 25-basis-point rate cut, with some room for a more aggressive cut depending on the CPI results. Political uncertainties, including the upcoming presidential debate, are adding another layer of complexity to the Fed’s decision-making process. Additionally, the results of a $58 billion Treasury note auction could provide further clues about market sentiment.

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Ultimately, the CPI report will be the key driver for determining how the Fed proceeds with its interest-rate policy, with inflation and political dynamics playing significant roles in shaping the outcome.

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