LONDON (Bloomberg) – U.S. government bond yields extended their retreat from the highest levels since November after an in-line reading of the Federal Reserve’s preferred gauge of inflation.
Treasury yields declined by at least two basis points as the data were viewed as supporting the case for at least one interest-rate cut this year. The two-year rate, more sensitive than longer-maturity tenors to changes by the Fed, retreated back below 5%. The 10-year yield fell about 4 basis points to 4.66%.
The data allayed concerns that were stoked Thursday by hotter-than-anticipated inflation data in the initial estimates of U.S. GDP the first quarter. In response, traders scrapped some of their remaining wagers on Fed rate cuts this year, no longer pricing one in before December.
Friday’s March personal income and spending data included price deflators that rose in line with expectations from February levels, while the 2.7% year-on-year rate continued to exceed the central bank’s 2% target.
“The moderation in rates in our view — and I think in the Fed’s view — doesn’t require inflation being at target by the end of the year by any means, as long as we can see some progress,” Andrew Sheets, global head of corporate credit research at Morgan Stanley, said on Bloomberg Television.
The personal consumption expenditures price index increased 0.3% in March, both overall and excluding the volatile food and energy components.
Thursday’s GDP report had stoked expectations for bigger increases, according to Omair Sharif, president of Inflation Insights LLC.
“The concern was that March would also be strong,” Sharif wrote in a note. “So the fact that it came in closer to consensus could be viewed with a sigh of relief.”
Also, futures open-interest data suggest that Thursday’s data motivated traders to set new short positions — wagers on higher yields — that increased the potential for a market rally in response to favorable data.