Bond traders are largely maintaining expectations that the US Federal Reserve will raise interest rates by the end of 2026 after a softer US core inflation print. Following the report, which showed core consumer prices excluding food and energy rising 0.2% month over month from April versus a 0.3% consensus forecast, pressure eased on Fed Chairman Kevin Warsh to act immediately. In interest-rate swap markets, traders continue to price in a hike by December, while Treasury yields are little changed. The yield on two-year notes, which typically reacts most to near-term policy expectations, is reported at about 4.11%, slightly lower than around 4.13% before the data. The US dollar also slips.
Market participants had previously been positioning for multiple potential rate increases and some options traders had looked at the possibility of an earlier move as soon as September after a strong employment report. The recent inflation reading is described as giving the Fed “breathing room,” but not removing the broader expectation of tightening. Separately, sources note that bond markets have already undergone repricing since late February, when geopolitical developments linked to an Israel-Iran attack drove oil prices higher, complicating rate-cut assumptions.
