The yield on the benchmark 10-year U.S. Treasury note fell to 4.04% on Wednesday, marking its lowest level in five months, as softening inflation data and robust demand in the latest bond auction bolstered investor confidence.
Fresh data revealed that both headline and core U.S. producer prices unexpectedly retreated in August, fueling optimism that disinflationary trends may soon benefit consumers.
For much of this year, concerns over persistent inflation pushed the Federal Open Market Committee (FOMC) to maintain its benchmark interest rates unchanged, even as signs of a weakening labor market emerged. With the Fed set to resume its rate-cutting cycle next week, analysts expect a 25 basis-point reduction, though a small portion of the market is still betting on a more aggressive 50 bps cut following the softer PPI release and disappointing August jobs report.
Despite easing price pressures, the yield curve has continued to steepen. Elevated inflation expectations and mounting criticism of the Fed from the White House have weighed heavily on longer-term maturities, leaving 30-year bonds underperforming significantly compared with shorter-term notes this year.
The latest 10-year Treasury auction reinforced investor appetite, clearing 3 basis points through the when-issued yield, a sign of strong demand.
Daleep Singh of PGIM noted in a recent commentary that while the Fed’s ultimate policy destination is clearer, the pace of monetary easing remains uncertain. He expects policymakers to gradually cut rates by 25 basis points at a time into 2025 until they reach an estimated neutral rate between 3.0% and 3.5%.
Singh added that the gradual strategy allows the Fed to better gauge the effects of tariffs, labor market constraints, and fiscal policy measures on inflation, which he forecasts will likely remain above 3% until at least 2026. The current effective federal funds rate is set at 4.25%–4.50%.
