(Bloomberg) -- Treasuries fell in a volatile trading session as a recovery in risk sentiment amid the deepening global trade war overshadowed a cooler-than-expected US inflation report.
The two-year yield, which reflects traders’ expectations for Federal Reserve policy, declined as much as four basis points to a session low of 3.90%, before rebounding to as high as 4%. The 10-year yield also whipsawed before rising as high as 4.33%.
The S&P 500 Index, meanwhile, was up 0.5% led by megacap tech shares, after swinging between gains and losses in the wake of the release of consumer price data. The consumer price index rose at the slowest pace in four months in February, but tariffs are expected to push up prices on some goods.
“Looking back, it is good news; looking forward, there is very little information” in the inflation data, said Mohamed El-Erian, president of Queens’ College, Cambridge and a Bloomberg Opinion columnist on Bloomberg Television. “We don’t know what the pass-through of expected and actual tariffs will be.”
Yields remained high after a $39 billion 10-year note auction was awarded at 4.310%, lower than the 4.315% level immediately before the 1 p.m. New York time bidding deadline. The auction is a reopening, meaning it increases the size of the newest 10-year note, created via an auction last month.
Traders are still fully pricing in another quarter-point interest-rate cut in June, with about 70 basis points of easing seen for all of 2025.
On Wednesday, Bureau of Labor Statistics data showed the consumer price index increased 0.2% month-on-month after a sharp 0.5% advance in January. Excluding the often-volatile food and energy categories, the so-called core measure rose 0.2% as well.
While the CPI came in lower than expected, a number of economists raised forecasts for personal consumption expenditures, which the Fed targets. That’s because some of the weak components in the CPI gauge, such as airfares, don’t directly feed into the PCE. Citigroup Inc., for instance, revised its forecast for the monthly increase of the PCE to 0.27%, from 0.19%.
“The inflation data is less important in the scheme of things right now in terms of economic uncertainty, policy fatigue and market volatility,” said Vishal Khanduja, head of broad markets fixed income at Morgan Stanley Investment Management. The market may have priced in too many rate cuts as the balance sheet of consumers and companies remains resilient, Khanduja said.
Treasuries have rallied in recent days amid a rout in equity markets that forced money managers to seek haven assets. A short-lived surge in stocks after the inflation report on Wednesday led to a drop in demand for havens, including US bonds.
“The bond market has been trading much more in line with equities,” said Subadra Rajappa, head of US rates strategy at Societe Generale SA.
Concerns have risen that President Donald Trump’s policies — including his on-and-off-again tariffs — will test the resilience of US consumers and the broader economy. Ten-year Treasury yields have fallen more than 50 basis points since peaking in mid-January as recession angst increased.
The CPI data “isn’t enough to get more long duration,” said George Goncalves, head of US macro strategy at MUFG. The broad market tone suggests a reticence among traders “to get long after such a big, multi-week move that has likely changed the positioning profile.”
In the options and futures markets, traders have been ramping up bets that Fed officials will have to slash rates more than expected this year, piling into call options on two-year Treasuries that will benefit from that scenario. The premium on these bullish bets has risen to the highest since September, when cooling job growth was feeding fears of a slowdown during the final months of Joe Biden’s presidency.
After the CPI report, trading included a couple of large block sales in the Treasury futures market, involving five-year and Ultra 10-year note contracts, adding to the pressure seen on cash yields.
--With assistance from Jade Khatib and Edward Bolingbroke.
