After The April Inflation Report, Treasury Yields Drop

On Wednesday morning, Treasury yields experienced a broad decline following the release of data showing that the annual headline rate of inflation from the consumer pricing index dropped to its lowest level in two years in April. 

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Despite this, analysts note that other parts of the CPI data reveal persistence in inflation that could result in policymakers keeping borrowing costs elevated for a longer period. 

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The release of the CPI data has increased the likelihood that the Federal Reserve will leave interest rates higher for an extended period. 

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In April, the annual rate of inflation from the U.S. consumer price index cooled to 4.9%, down from a 5% year-over-year increase in March, representing the lowest level since April 2021. However, the core measure, which excludes food and energy costs, rose 5.5% over the past 12 months, down only slightly from a 5.6% gain in March. 

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The Fed is still expected to take its fed-funds rate target back down to between 4.25% and 4.5% by December, according to 30-day Fed Funds futures, despite an 87% probability that the Fed will leave interest rates unchanged between 5% and 5.25% on June 14, and a 13% chance of a quarter-point hike next month, according to Trade Algo. 

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Andrew Hunter, Deputy Chief U.S. Economist at Capital Economics, commented on the data, stating that while he does not think it will be enough to convince the Fed to hike rates again at the June FOMC meeting, the figures suggest that there is a risk rate will need to remain high for a little longer than previously assumed.

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