Treasuries Rally After Inflation Data Strengthens Rate Cut Outlook

U.S. Treasuries gained ground after a delayed government report showed inflation rose less than expected in September, giving markets greater confidence that the Federal Reserve is preparing to cut interest rates at its upcoming policy meeting.

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The move came as traders reacted to fresh data showing that consumer prices are continuing to ease a sign that the central bank’s aggressive tightening campaign may finally be achieving its goal of slowing inflation without derailing economic growth.

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Yields on two-year Treasuries, which are especially sensitive to changes in monetary policy, slipped by about five basis points. The 10-year benchmark yield also dropped, retreating below the closely watched 4% level, as investors piled into bonds following the softer inflation reading.

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The consumer price index (CPI) report, which had been postponed due to the recent federal government shutdown, revealed that core inflation which strips out food and energy prices rose just 0.2% in September. That was slightly below economists’ expectations for a 0.3% increase, suggesting price pressures are continuing to moderate.

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On an annual basis, the CPI rose 3.0%, down from 3.2% the previous month but still above the Federal Reserve’s 2% target. While inflation remains somewhat elevated, the slower pace of monthly gains is fueling optimism that the Fed may soon pivot toward easing monetary policy to support growth.

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Investors are now betting heavily that the central bank will lower rates at its next meeting, with futures markets fully pricing in a quarter-point cut. The sentiment marks a notable shift from earlier this year, when stubbornly high inflation and resilient labor data led some policymakers to signal that rates might stay higher for longer.

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“This report is another piece of evidence that inflation is on the right track,” said one market strategist. “The Fed now has more room to begin cutting without risking its credibility on price stability.”

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Bond traders have been closely monitoring inflation data for clues on when rate relief might arrive. Declining yields typically signal expectations of slower economic growth or future rate cuts, and this latest move suggests investors are positioning for both.

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The rally in Treasuries also comes amid growing signs that the U.S. economy is cooling in a controlled way. Recent reports have shown a gradual softening in consumer spending and a moderation in the labor market developments that could help bring inflation closer to the Fed’s comfort zone.

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Still, officials have made clear they want to see consistent progress before declaring victory. Fed Chair Jerome Powell recently reiterated that policymakers remain “data dependent” and will continue to assess economic indicators before making any major policy shifts.

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For now, markets appear confident that the worst of the inflation spike is behind us. With borrowing costs already at their highest level in over two decades, even a modest rate cut could provide meaningful relief for households and businesses facing tighter financial conditions.

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Lower inflation readings could also bolster equity markets, which have been volatile in recent weeks as investors weighed the possibility of slower growth against hopes for easier policy. Historically, declining inflation and falling yields have tended to support higher stock valuations by reducing the discount rate applied to future earnings.

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However, some analysts caution that the path to the Fed’s 2% goal may still be uneven. Energy prices, supply chain disruptions, or geopolitical tensions could easily reintroduce upward pressure on prices in the months ahead.

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“The data is encouraging, but we’re not completely out of the woods yet,” another analyst said. “It’s important that inflation continues trending lower in the next few readings to give the Fed confidence to act.”

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As markets await the Fed’s next move, attention will turn to upcoming economic releases, including the producer price index (PPI) and retail sales figures. Both will offer additional insight into whether the disinflation trend is sustainable and whether rate cuts will come sooner rather than later.

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For now, the softer CPI report has given investors a reason to breathe easier. Treasury yields are sliding, expectations for policy easing are rising, and the outlook for both bonds and equities has brightened as inflation pressures continue to cool.

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