Treasury Yields Hit Lowest Level Since March Following Post-CPI Rally

Treasurys experienced a significant rally on Thursday morning, causing yields to drop sharply. This movement followed the release of June's consumer price index (CPI) data, which indicated a greater-than-expected easing in inflation. This development has increased market expectations for a potential Federal Reserve interest-rate cut by September.

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The yield on the 2-year Treasury dropped to 4.514%, down 11.6 basis points from 4.630% on Wednesday. This decline positions the 2-year yield for its lowest closing level since March 8. Similarly, the 10-year Treasury yield fell 9.4 basis points to 4.186%, down from 4.280% the previous day. If these levels hold through the close of trading at 3 p.m. Eastern time, the 10-year yield would reach its lowest point since at least March 12. The 30-year Treasury yield also decreased, dropping 7.6 basis points to 4.394% from 4.470%, marking its lowest level since June 25.

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The key driver of this market movement was the CPI data released on Thursday. June's consumer price index showed a 0.1% decline following no change in May. This was the first drop in the CPI since May 2020. The annual inflation rate also slowed to 3% from 3.3%, matching the lowest level since April 2021. The core CPI, which excludes food and energy, rose only 0.1% for the second consecutive month. On an annual basis, the core rate eased to 3.3% from 3.4%.

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Karen Manna, a portfolio manager at Federated Hermes, which manages $740 billion in assets, commented on the implications of this data. "This is where it gets tricky," she said. "Has the Fed overstayed their welcome? Are rates perhaps too restrictive if prices are coming down much faster than earlier in the year? There are more questions than answers from this report, which could force the Fed to act in September. Considering the recent labor weakness, the economy and the pace of deterioration will become a big part of any debate."

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In addition to the CPI data, initial jobless-benefit claims fell by 17,000 to 222,000 for the week ending July 6, the lowest level since May and below economists' expectations.

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The easing inflation and declining jobless claims have influenced traders' expectations regarding the Federal Reserve's actions. According to the CME FedWatch Tool, there is now an 81.3% chance that the Federal Reserve will cut rates by a quarter of a percentage point by September, up from a 69.7% chance on Wednesday.

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Fed Chair Jerome Powell addressed Congress on Tuesday and Wednesday, highlighting that elevated inflation is not the only risk facing the U.S. economy. He emphasized the importance of timing any rate cuts appropriately.

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The aggressive rally in Treasurys and the subsequent drop in yields were driven by lower-than-expected inflation data and falling jobless claims. These factors have bolstered market expectations for a potential Federal Reserve rate cut by September. As inflation shows signs of easing and labor market indicators improve, traders and analysts are closely watching the Fed's next moves, with many anticipating a rate cut in the near future.

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