Inflation Surprises in the US Lead to a Drop in Treasury Yields

The world’s largest bond market rallied after April’s inflation figures came in lower than expected, bolstering the argument for at least two interest-rate cuts by the Federal Reserve before the year ends.

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Yields on U.S. Treasury bonds fell across the curve, with the most significant declines seen in shorter-term maturities — those most sensitive to changes in Fed policy. This market reaction followed the release of consumer price data that showed inflation pressures easing more than anticipated. Meanwhile, equity markets wavered in early trading on Wall Street, coming off a recent rally that had driven the tech-heavy Nasdaq 100 into bull market territory.

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According to data released Tuesday by the Bureau of Labor Statistics, the core Consumer Price Index — which strips out volatile food and energy costs — increased 0.2% from March. On an annual basis, core CPI rose 2.8%, the same rate as the previous month. Headline CPI, which includes all categories, also rose 0.2% for the month and was up 2.3% compared to April of last year.

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These softer inflation numbers renewed investor optimism that the Fed could soon ease monetary policy. Interest-rate swaps — financial instruments used by traders to hedge or bet on central bank moves — are now pricing in around 55 basis points of rate reductions by the end of 2025. This suggests at least two quarter-point cuts, with the first fully priced in for September.

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The outlook has shifted rapidly in recent days. Earlier this week, traders had reduced their expectations for rate cuts due to signs of easing tensions between the U.S. and China on trade. But the latest inflation data has tilted the balance back toward a more dovish Fed.

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“The latest inflation numbers support the idea that core inflation was already on a downward path before the renewed trade tensions,” said Vail Hartman, a strategist at BMO Capital Markets. “This provides a relatively solid base from which the U.S. economy can absorb some of the upward pressure on prices that’s likely to result from the recent tariff hikes.”

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While the Trump administration’s tariffs are expected to drive up consumer prices over time, many companies may be holding off on price increases for now. This is likely due to the large inventories they built up in anticipation of earlier supply chain disruptions. Until these excess stocks are cleared, businesses appear to be exercising restraint in passing on higher costs to consumers.

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That said, the situation remains fluid. Over the weekend, the U.S. and China agreed to temporarily scale back tariffs, reducing the combined duties on most Chinese imports from 145% to 30%. This 90-day reprieve has offered businesses some breathing room, but it’s not a permanent solution. U.S. importers are still facing elevated costs and remain wary of a potential spike in tariffs once the pause expires. The uncertainty around future trade policy continues to cast a shadow over the inflation outlook.

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Market responses were swift following the inflation report. The yield on the 10-year U.S. Treasury note fell two basis points to 4.45%, continuing a broader decline in borrowing costs that began earlier in the week. The Dollar Spot Index, which tracks the U.S. currency against a basket of global peers, dropped 0.3%, reflecting the market’s growing belief that the Fed will need to ease rates to support the economy.

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Meanwhile, futures on the S&P 500 were little changed, with investors processing both the inflation data and the latest trade developments.

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Though inflation remains above the Fed’s 2% target, the trend appears to be cooling, at least for now. If core inflation continues to hold steady or decline in the coming months, it will give the central bank more confidence to begin easing interest rates — especially as growth moderates and global economic risks persist.

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However, the path ahead is far from certain. The temporary rollback in tariffs may offer relief, but a re-escalation could quickly reverse these inflationary gains. Moreover, any congestion in supply chains as companies rush to restock could result in faster price increases, as Bloomberg Economics has noted.

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For the time being, the bond market is taking the inflation news as a positive signal. With inflation slowing and Fed rate cuts on the horizon, investor appetite for Treasuries has increased, driving yields down. But much depends on how trade dynamics evolve and whether companies begin passing on costs as expected.

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In summary, April’s inflation report helped ease immediate concerns about price growth and bolstered hopes for Fed rate cuts later this year. Still, with geopolitical uncertainties and potential supply chain issues looming, markets remain on alert for further developments.

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