(Bloomberg) -- Treasuries rallied, sending 10-year yields to the lowest in more than a month, after benign inflation data and a weaker-than-expected retail sales figure prompted traders to boost expectations for the Federal Reserve to cut interest rates this year.
Ten-year yields on Wednesday declined as much as 10 basis points to 4.34%, the lowest since April 10. Two- and five-year yields followed suit, down about eight basis points. Traders in interest-rate swaps priced in more than an 80% chance that US policymakers cut rates by a quarter-point by September.
“This is a Fed-friendly CPI print,” said John Velis, a strategist at Bank of New York Mellon. “In combination, these two releases suggest that a September cut is still possible.”
A government report showed the so-called core consumer price index, which excludes food and energy costs, increased 0.3% from March, matching economists' forecast and marking the first slowdown in six months. A separate report showed retail sales stagnated in April after downwardly revised gains in the prior two months.
To Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities, the data reinforces Fed Chair Jerome Powell's “notion of ‘higher-for-longer' to potentially lower.”
Earlier in the week, Powell said the central bank must be patient and wait for evidence that inflation continues to cool before bringing down interest rates.
Traders in US Treasury options had been positioning for a bond rally in reaction to the data. In the week leading up to the release, heavy buying centered on options that stood to benefit from 10-year yields dropping to roughly 4.3%. One high-risk trade stood out: It would reap a potential $15 million windfall on a wager of just $150,000 should the 10-year benchmark fall even further to 4.25% by May 24.
“The reason for the market reaction is that we didn't get an upside surprise,” David Kelly, chief global strategist at JPMorgan Asset Management said on Bloomberg Television. “Overall, things are moderating.”
(Updates with more detail throughout.)
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