Treasuries Fall As Wholesale Inflation Dents Fed Rate-Cut Bets

Treasuries moved lower after wholesale inflation came in stronger than expected, prompting traders to pare bets the Federal Reserve will cut interest rates next month. 

The yield on two-year notes, which are most sensitive to changes in monetary policy, rose four basis points to 3.72% Thursday morning in New York. The benchmark 10-year yield edged higher, and the dollar gained against a basket of peers.

The moves followed the producer price index increasing 0.9% in July, more than economists had estimated. The reading suggested companies are raising prices to offset costs associated with higher trade tariffs.

The data at least temporarily dented expectations that a cut at the September meeting is a sure thing, which were solidified by a largely benign reading on consumer prices on Tuesday. Traders on Thursday pulled back on bets for a cut, with interest-rate swaps showing a 90% chance of a reduction, down from more than 100% a day earlier.

“Given how benign the CPI numbers were on Tuesday, this is a most unwelcome surprise to the upside and is likely to unwind some of the optimism of a ‘guaranteed’ rate cut next month,” wrote Chris Zaccarelli, chief investment officer for Northlight Asset Management.

Investors are now turning their focus to the Fed’s annual symposium in Jackson Hole, Wyoming, where Chairman Jerome Powell is slated to speak. 

Policymakers have been weighing mixed economic data ahead of the September 16-17 meeting. President Donald Trump has repeatedly called for the Fed to bring down borrowing costs. Treasury Secretary Scott Bessent said economic models show rates could come down by around 150 basis points to reach the so-called neutral rate.

That added fuel to wagers on a cut in September, with some piling into bets on an outsize, 50-basis-point reduction. 

“A fifty basis-point move in September might be taken off the table with worries about inflation ticking up a little bit here,” Ira Jersey, chief US interest-rate strategist at Bloomberg Intelligence, told Bloomberg Surveillance Thursday.