Treasury Yields Fall on Bets for a September Rate Cut

U.S. Treasury yields fell Wednesday as traders raised bets that the Federal Reserve will resume interest-rate cuts in September and after a backup in longer-dated yields on Tuesday attracted foreign buyers.

Tuesday’s consumer price inflation report showed that President Donald Trump’s tariff policies have not yet increased price pressures as many Fed policymakers including Chair Jerome Powell have anticipated.

As a result, it is more likely that the Fed will cut rates as the labor market weakens and other data also points to a slowing economy.

“The general sense is that we were going to see more pass-through (inflation) in July. That didn't happen," said Vail Hartman, U.S. rates strategist at BMO Capital Markets.

"That doesn't mean we're not going to see it in the coming months, but the fact that it didn't happen in July has now galvanized those calls for a September cut, particularly given that we've already seen the labor market start to come under pressure in the last couple of months,” he said.

Investors will focus on whether Powell offers any new clues on policy at the U.S. central bank’s annual economic policy symposium in Jackson Hole, Wyoming, next week.

With the market already pricing in a September cut, the question is most likely to be whether Powell pushes back against market expectations, said Hartman.

Fed funds futures traders are now pricing 25.7 basis points in cuts in September, indicating they are beginning to see the possibility that the Fed could cut rates by 50 basis points next month.

Treasury Secretary Scott Bessent said on Wednesday that there is a good chance of a 50-basis-point cut next month.

Chicago Fed President Austan Goolsbee said the U.S. central bank is grappling with understanding whether tariffs will push up inflation just temporarily or more persistently, which would inform its decision on when to cut rates.

The interest-rate-sensitive 2-year note yield was last down 4.2 basis points on the day at 3.689%. The yield on benchmark U.S. 10-year notes fell 5.3 basis points to 4.24%.

The yield curve between 2-year and 10-year notes flattened by around one basis point to 55 basis points.

Longer-dated Treasuries attracted buyers following a backup in yields on Tuesday that was driven by a selloff in European government bonds.

“The post-CPI dip that we saw yesterday proved to be an attractive level to add from the perspective of overseas investors,” said Hartman.

Traders are also focused on who Trump is likely to nominate as the next Fed chair when Powell’s term ends in May.

The Trump administration is considering 11 candidates to replace Powell, CNBC reported on Wednesday, citing two administration officials.

Meanwhile, Ukraine and its European allies on Wednesday signaled hope that Trump would push for a ceasefire at talks with Russia's Vladimir Putin without selling out Ukraine's interests or proposing to carve up its territory.