(Bloomberg) — U.S. Treasuries were off their highs late Friday after a closely watched batch of inflation data came in lower than expected, leading traders to raise the forecasts for Federal Reserve interest rate cuts next year.
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The policy-sensitive two-year Treasury yield was slightly lower at 4.31% late Friday afternoon, after slipping early to 4.25%. The benchmark 10-year rate was down 4 basis points to 4.51% in late trade. The moves unwound a steep trend this week that had pushed a portion of the yield curve to its steepest since 2022. Treasuries held on to early gains after a University of Michigan survey showed US consumer sentiment rose for a fifth month in December.
The data earlier Friday showed that in November the core personal consumption price expenditure index, the Fed's preferred measure of core inflation, rose 0.1% from October and 2.8% from a year earlier – both levels slightly below forecasts. consensus.
Exchange traders are pricing in about 39 basis points of total Fed cuts next year, suggesting less than two full quarter-point reductions. But many on Wall Street expect the central bank to cut more than that.
“We anticipate more cuts from the Fed next year,” said Subadra Rajappa, head of US rates strategy at Societe Generale, on Bloomberg Television. He said the company's economists expect cuts of four quarter points next year. “The way the economy is going you should see a moderation in growth, you should see a moderation in employment, you should see a moderation in inflation,” he said.
This week's pressure on long-dated debt pushed the 10-year Treasury yield higher than the two-year rate, the biggest since 2022.
The steepness came after the Fed on Wednesday signaled a slower pace of rate cuts next year given signs of sticky inflation. The median of Fed officials' quarterly forecasts suggested a drop of two quarter points in 2025, compared to the four moves they predicted in September.
“The Fed is trying to communicate a move to the next phase in the easing cycle,” said Julian Potenza, portfolio manager at Fidelity Investments. “Overall, there's a pretty wide spread of possible outcomes for policy next year, but for us, we think the root cause is probably a continuation of a modest easing cycle.”