Treasury Yields Fall as Markets Await U.S. Inflation Data

Treasury yields eased lower on Friday morning following November’s inflation data, which showed less upward pressure than anticipated based on the Federal Reserve’s preferred measure.

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Yields across Treasury maturities saw declines:

• The 2-year Treasury yield dropped by 4.5 basis points to 4.271%, down from 4.316% on Thursday.
• The 10-year Treasury yield declined by 6.4 basis points to 4.505%, compared to 4.569% the previous day.
• The 30-year Treasury yield fell 3.5 basis points, settling at 4.704% from 4.739% on Thursday.

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Notably, Thursday’s closing levels for the 10-year and 30-year yields marked their highest points since May 29.

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What’s Driving the Markets

The decline in yields was primarily driven by softer inflation data. The personal consumption expenditures (PCE) price index, considered the Federal Reserve’s preferred gauge for inflation, rose just 0.1% on a monthly basis in November, falling short of the expected 0.2% increase. This trend also held true for the core PCE reading, which excludes the more volatile food and energy components.

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On a year-over-year basis, the overall PCE index edged up to 2.4% from 2.3%, while the core annual rate remained steady at 2.8%.

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Despite the subdued inflation readings, market expectations regarding the Federal Reserve’s next steps in January remained unchanged. Data from LSEG indicated an 89.3% probability that the Fed would leave rates untouched at its January 29 meeting. The odds of a quarter-point rate cut stood at 10.7%.

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Long-term Treasury yields, which had surged to their highest levels in nearly seven months on Thursday, retreated on Friday. This followed a sharp selloff in 10-year and 30-year Treasuries during the prior session, spurred by several factors. These included concerns over slower and less pronounced rate cuts in 2025, persistently high inflation, robust U.S. economic growth, potential tariffs, and rising fiscal deficits under the incoming Trump administration.

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Adding to the uncertainty, investors were closely monitoring the risk of a partial government shutdown. This concern arose after the House of Representatives rejected President-elect Donald Trump’s proposal to fund government operations. If unresolved, a shutdown could begin as early as midnight on Friday.

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The softer-than-expected inflation data provided some relief to bond markets after Thursday’s dramatic selloff. When inflation appears under control, it reduces pressure on the Federal Reserve to maintain or increase interest rates. This, in turn, makes longer-term government debt more appealing, resulting in lower yields.

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However, Thursday’s selloff highlighted broader concerns about the economic outlook and fiscal policy. Traders had adjusted their positions based on expectations of less aggressive rate reductions by the Fed in 2025, which reflects the central bank’s caution in combating persistent inflation while supporting economic growth.

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The rising federal deficit and speculation about potential tariffs under the incoming administration further complicated the picture, as both factors could drive inflation higher and limit the Fed’s flexibility to cut rates. Additionally, robust U.S. economic data has bolstered confidence in the economy’s resilience, even amid fiscal and monetary policy challenges.

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The possibility of a government shutdown added another layer of complexity. A prolonged shutdown could disrupt economic activity and erode investor confidence, though its immediate impact on Treasury yields remains uncertain. Historically, market reactions to government shutdowns have been mixed, depending on their duration and perceived severity.

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Looking ahead, investors will continue to monitor inflation data, economic indicators, and any developments related to fiscal policy under the incoming administration. The trajectory of Treasury yields will depend on how these factors interact and influence the Federal Reserve’s approach to monetary policy.

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In the near term, attention will remain focused on the Fed’s January meeting and the possibility of rate cuts later in the year. While the current consensus points to no changes in January, any unexpected shifts in economic data or inflation trends could alter market expectations.

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Investors should also stay alert to developments regarding the government funding situation. While a shutdown would not directly impact Treasury yields, prolonged uncertainty could weigh on overall market sentiment and create volatility in financial markets.

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In summary, Friday’s dip in Treasury yields underscores the bond market’s sensitivity to inflation data and broader economic conditions. With fiscal policy, inflation trends, and monetary strategy all in flux, Treasury yields are likely to remain a focal point for market participants heading into the new year.

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