Yields on longer-term U.S. Treasuries fell on Friday after data showed inflation gains in March were largely in line with economists’ expectations, easing concerns about the closely watched report showing rising prices much larger than expected.
The personal consumption expenditures (PCE) price index rose 0.3% last month, an annual increase of 2.7%. Economists polled by Reuters had forecast the index would rise 0.3% for the month and 2.6% for the year.
Core prices also rose 0.3% during the month, as expected, for an annual gain of 2.8%, higher than economists’ expectations of a 2.7% increase.
A higher-than-expected consumer price inflation report for March released earlier this month raised concerns that price pressures would take longer to approach the annual target of 2 % set by the Federal Reserve.
Gross domestic product (GDP) data for the first quarter, released on Thursday, also showed inflation rising more than expected.
“Investors have been bracing for a still slightly elevated inflation number thanks to the first-quarter GDP report,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.
Sentiment data from the University of Michigan showed consumers raised their one-year inflation forecast to 3.2%.
Traders have pushed back expectations for when the Fed is expected to begin cutting rates as price pressures remain high.
This price revision could allow Fed Chairman Jerome Powell to acknowledge that the likelihood of a short-term interest rate cut is lower after the conclusion of the U.S. central bank’s two-day meeting on Wednesday , without shaking the market.
“They are now in a situation where the market is expecting a lot less,” said Stephen Gola, head of U.S. Treasury sales and trading at StoneX Group in New York. “If the Fed changes its tone a little, it won’t shock anyone.
Fed funds futures traders are currently pricing in a 25 basis point cut and a half this year, with the first cut likely in September. By comparison, at the March meeting, the Fed had planned three reductions, which were to begin as early as June.
Mr. Gola expects Mr. Powell to make comments after the Fed meeting similar to those he made last week, when he indicated that monetary policy should remain tight for longer.
“The recent data clearly has not given us any more confidence and instead indicates that it will likely take longer than expected to achieve that confidence,” Powell said.
Yields on the 10-year Treasury note fell 4 basis points on the day to 4.671%, after hitting 4.739% on Thursday, their highest level since November 2.
Two-year yields were little changed at 4.998%, after hitting 5.027% on Thursday, their highest level since November 14.
The yield curve inversion between two- and ten-year bonds widened by three basis points to minus 33 basis points.
The Treasury Department is also expected to leave most auction sizes unchanged when it announces its redemption plans for the coming quarter next week, and it is likely to launch a bond buyback program.
