Treasury Bonds Hold Weekly Gains as the Inflation Gauge Stabilizes

US Treasury yields held onto their weekly gains on Friday, supported by expectations of Federal Reserve interest rate cuts after the central bank’s preferred inflation gauge came in line with economist forecasts.

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Yields across maturities were marginally higher up to three basis points on the long end remaining largely unchanged after the release of July personal income and spending figures. This report includes the personal consumption expenditures (PCE) price indexes, which the Fed uses as its primary inflation benchmark, aiming to keep it near the 2% target.

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Headline PCE inflation held steady at 2.6% in July, while the core PCE price index, which excludes food and energy, rose 2.9% year-over-year, compared with 2.8% in June.

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The data reinforced investor confidence that the Fed is likely to deliver two interest rate cuts this year, starting as early as next month, amid signs of a cooling labor market even though inflation remains above target.

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“Inflation is rising only slightly, but right in line with expectations, and today’s PCE numbers should only boost the odds of a Fed rate cut next month,” noted Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management.

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Supporting that view, Fed Governor Christopher Waller, who along with Governor Michelle Bowman dissented from last month’s hold decision in favor of a cut, reiterated his stance on Thursday. In his remarks, Waller said he backs a September rate reduction and expects additional cuts over the next three to six months.

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Yields on two- to five-year Treasuries, which are most sensitive to Fed policy changes, reached their lowest levels since early May this week. The decline was partly fueled by President Donald Trump’s efforts to appoint new central bank officials who favor monetary easing.

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The latest two-year note, auctioned on Tuesday at 3.641%, strengthened the following day to 3.61% and was trading near 3.63% by Friday.

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The combination of steady inflation, a softer labor market outlook, and policy signals from key Fed officials has set the stage for a potential shift in monetary policy as soon as next month. This has fueled demand for Treasuries, particularly at the short end of the curve, as investors position for rate cuts that could extend into 2025.

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For fixed-income investors, this trend underscores the importance of monitoring PCE inflation data, Fed commentary, and labor market indicators, as these remain critical drivers of yield movements and bond pricing.

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With expectations for monetary easing gaining traction, market participants will closely watch upcoming economic data especially next Friday’s jobs report for further confirmation of labor market softness. Any significant deviation from forecasts could either reinforce or challenge the current market narrative on rate cuts.

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