(Bloomberg) -- Treasuries fell as the prospect of an escalating global trade war overshadowed a cooler-than-expected US inflation report.
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The two-year yield, reflecting expectations for Federal Reserve monetary policy, declined as much as four basis points to a session low 3.90%, then rebounded to 4%. The 10-year yield also whipsawed before rising as high as 4.33%. The S&P 500 Index, meanwhile, surged more than 1% before paring the gain.
“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, said on Bloomberg Television. “We don’t know what the pass-through of expected and actual tariffs will be.”
Traders are still fully pricing in the first quarter-point interest-rate cut of the year 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% 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.
Treasuries have been rallying in recent days amid a rout in the equity market that forced money managers to seek shelter in 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. By 11 a.m. New York time, both US yields and the S&P 500 were little changed.
“The bond market has been trading much with more in line with equities,” said Subadra Rajappa, head of US rates strategy at Societe Generale.
Anxiety has been building that President Donald Trump’s policies — including 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 has increased.
The CPI data, therefore, “isn’t enough to get more long duration,” 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 Fed officials will have to slash rates more than expected this year, piling into call options on two-year Treasuries that will profit in that scenario. The premium on these bullish bets has risen to the highest since last September, when slowing job growth was feeding fears of a slowdown during the final months of Joe Biden’s presidency.