US yields decline as inflation data boosts confidence in interest rate cuts

US Treasury yields declined on Friday as a key inflation reading for May showed price pressures cooled in line with expectations, strengthening the case for monetary policy easing to start this year.
 

Excluding the volatile food and energy components, the May price index for personal consumption expenditures (PCE), one of the Federal Reserve's favored measures of inflation, increased 0.1% in May and 2.6% annually, both prints in line with forecasts.
 

Inflation had rebounded in the first quarter but it has been retrenching over the past few months, along with a slowdown in economic activity. This has raised the prospect that the Federal Reserve may cut rates twice this year from the current 5.25%-5.5% range to avoid pushing the economy to a recession.
 

"We believe the Fed's rate cut cycle is going to be potentially earlier than people expect," said Tony Roth, chief investment officer at Wilmington Trust, adding that a rate cut as soon as July, though unlikely, was also possible.
 

"We are seeing a clear slowing in the economy, slowing in the demand for labor, increase in the supply for labor, and we think the inflation problem is clearly behind us," he said.
 

Futures contracts tied to the policy rate on Friday implied a 61% chance of a quarter-point rate cut in September, compared with 59.5% on Thursday, CME Group data showed. Traders were betting on a total of 47 basis points of cuts this year after the release, compared to 45 points earlier.
 

The May slowdown in inflation was a relief for investors who have had to readjust their expectations on how soon the central bank could shift to a less restrictive stance several times since it last hiked rates in July last year.
 

"This is the lowest monthly core inflation increase that we've seen this year and it furthers the narrative that the disinflationary trend that stalled during the first quarter is back to life again," Olu Sonola, head of U.S. economic research at Fitch Ratings said in a statement.
 

Benchmark 10-year yields, which move inversely to prices, were last at 4.27%, nearly two basis points down on the day.
 

Two-year yields, which tend to more closely reflect monetary policy expectations, were last at 4.673%, about four basis points lower than on Thursday and at their lowest in two weeks.
 

The spread between two and 10-year yields remained deeply negative but narrowed to minus 40 basis points, its smallest in about a month.
 

An inversion in that part of the yield curve, which happens when shorter-dated Treasuries yield more than longer-dated ones, is closely watched by investors as it has historically signaled a recession is in the horizon.