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Key Takeaways
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Treasury yields registered their biggest intraday decline since August on Wednesday after newly released consumer inflation data revived hope for more interest rate cuts this year.
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Even with Wednesday's decline, the 10-year Treasury yield, which influences commercial and consumer lending rates, remains a full percentage point higher than it was when the Federal Reserve began cutting interest rates in September.
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Stocks got a boost from lower yields on Wednesday, with the S&P 500 on track to have its best day in more than two months.
Treasury yields tumbled on Wednesday as market participants breathed a sigh of relief that there were few surprises in December's consumer inflation data.
The 10-year Treasury yield dropped about 14 basis points Wednesday afternoon, its biggest intraday decline since August.
Inflation ticked up in December, as economists and Wall Street expected. Core inflation, which excludes food and energy prices and is considered by the Federal Reserve to be a more reliable measure of price pressures, slowed last month to its lowest level since July.
Market participants have become increasingly antsy in recent weeks that strong economic data will prevent the Fed from cutting interest rates this year nearly as aggressively as they once expected. Some have even become nervous that officials may need to reverse course and raise rates again to return inflation to the Fed's 2% target.
New Inflation Data Favors Another Rate Cut
Wednesday's inflation report helped reassure investors that the Fed will lower its benchmark federal funds rate at some point this year. The odds of at least one 25-basis-point rate cut by the middle of the year increased to 64% from 57% Tuesday, according to fed funds futures trading data. The odds of no cut this year declined to less than 17% from nearly 26%.
A slew of strong economic reports and the imminent inauguration of President-elect Donald Trump—whose tax, immigration, and tariff policies some economists warn could reinvigorate inflation—has caused yields to climb relatively steadily in recent months. Since mid-September, the 10-year Treasury yield, which influences an array of commercial and consumer lending rates, has increased by more than 1 percentage point, while the Fed has cut interest rates by the same amount.
Rising yields have weighed on stocks. The S&P 500 as of Wednesday had pulled back about 3% from the record high it hit in early December. Higher rates hurt equities by raising borrowing costs for businesses, eating into their profits, and diverting capital from the stock market to bonds. Stocks popped on Wednesday, with the S&P 500 on track to have its best day since November.