Treasuries advanced significantly today, with yields falling across the curve, after the release of the May Personal Consumption Expenditures (PCE) price index indicated a cooling of inflation. The core PCE, the Federal Reserve's preferred measure, showed a month-over-month increase of 0.3%, aligning with consensus and calming fears of an immediate aggressive rate hike cycle. This benign inflation report spurred investors to dial back their expectations for further monetary tightening from the Fed.
The decline in Treasury yields was particularly pronounced in shorter-dated maturities, which are most sensitive to changes in monetary policy. For instance, the yield on the US 10-year Treasury note fell to around 4.4%, a decrease of nearly 10 basis points, reaching its lowest level in over six weeks. This movement reflects a shift in market sentiment, where traders are now pricing in a reduced likelihood of rate increases by the Federal Reserve in the coming months.
Contributing to this positive market mood were several factors beyond the PCE data. Recent progress in US-Iran peace negotiations has led to a significant drop in oil prices, with Brent crude plummeting to around $72 per barrel, close to pre-conflict levels. The reopening of the Strait of Hormuz has further eased inflationary pressures stemming from potential supply disruptions. Additionally, a global selloff in semiconductor stocks, fueled by concerns over the rapid rise in AI-related equities, pushed investors towards safer assets like government bonds. These combined elements have created a more dovish outlook for the Fed, with market participants now expecting the central bank to potentially keep rates unchanged at its July 29 meeting, with a 60% probability.
However, despite the current market reaction, the Federal Reserve's hawkish stance from last week, articulated by Chair Kevin Warsh, still looms. Warsh had reaffirmed his commitment to controlling inflation, suggesting that further hikes might be necessary. While current odds for a September rate hike have decreased to roughly 68% (from 29% a week ago), the upcoming economic calendar, including Q1 2026 GDP figures, Durable Goods Orders, and jobless claims, will be closely watched for further clues on the Fed's trajectory. The 5- and 10-year breakeven rates, market measures of inflation expectations, are currently at 2.24% and 2.21% respectively, down from mid-April peaks of 2.72% and 2.5%.
