(Bloomberg) — U.S. Treasuries rose off their highs late Friday after a batch of closely watched inflation data came in below expectations, prompting traders to raise expectations of interest rate cuts by the Federal Reserve next year.
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The policy-sensitive two-year Treasury yield was at 4.31% late Friday afternoon, after an early decline to 4.25%. The benchmark 10-year interest rate fell 4 basis points to 4.51% in late trading. The moves broke up a sharp uptrend this week that pushed part of the yield curve to its highest levels since 2022. Treasuries held on to early gains after a University of Michigan survey showed U.S. consumer sentiment rose for a fifth month in December.
Data earlier Friday showed that the November core personal consumption expenditures price index, the Fed’s preferred measure of core inflation, rose 0.1% from October and 2.8% from a year earlier — both slightly below consensus expectations.
Swaps traders are pricing in about 39 basis points of total Fed cuts next year, which would mean less than two full quarter-point cuts. But many on Wall Street expect the central bank to cut further.
“We expect more cuts from the Fed next year,” Subdra Rajappa, head of US interest rate strategy at Société Générale, told Bloomberg TV. She said the company’s economists expect Fed cuts of four quarter points next year. She said: “The way the economy is going, you must see moderation in growth, you must see moderation in employment, and you must see moderation in inflation.”
Pressure this week on longer-term debt pushed 10-year Treasury yields above the two-year rate by the most since 2022.
The decline came after the Federal Reserve signaled on Wednesday that the pace of interest rate cuts next year would slow in light of signs of steady inflation. Fed officials’ average quarterly forecast implied a quarter-point cut in interest rates in 2025, relative to the four moves they expected in September.
“The Fed is trying to get the shift to the next stage in the easing cycle,” said Julian Potenza, portfolio manager at Fidelity Investments. “Overall, there is a very broad distribution of potential policy outcomes next year, but for us, we think the base case is probably a continuation of a modest easing cycle.”
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