US Treasury yields dip as Fed rate cut expectations firm
US import prices fall 0.4% in September
Markets price in 96.3% chance of 25 bps rate cut at next Fed meeting
Retail sales data on Thursday eyed
By Chuck Mikolajczak
NEW YORK, Oct 16 (Reuters) -U.S. Treasury yields were modestly lower on Wednesday, with the benchmark 10-year note yield down for a third straight session as investors locked in expectations for the path of Federal Reserve rate cuts ahead of data on consumer strength.
The 10-year yield had risen for four straight weeks, reaching 4.12% last week, its highest since July 31, in the wake of a strong payrolls report that diminished expectations for another outsized rate cut of 50 basis points (bps) from the Fed at its November policy meeting.
Labor Department data on Wednesday showed import prices slipped 0.4% last month, the biggest drop since December 2023, after a revised 0.2% decrease in August, amid a sharp decrease in the cost of energy products and indicating a benign inflation outlook that keeps the Fed on course to continue cutting interest rates.
The data comes ahead of retail sales figures on Thursday that will shed light on the health of the consumer.
"Most likely if they come around expectations, it's supportive of a still resilient and strong consumer, so not pointing to the need for super fast rate cuts," said JoAnne Bianco, BondBloxx partner and client portfolio manager in Chicago.
"We translate this into our view of where we think value is in the markets and we think the backup in yields that we've seen really has represented an opportunity for investors to increase their allocation to fixed income."
Markets are now pricing in a 96.3% chance for a cut of 25 bps at the Fed's next meeting, with only a 3.7% chance the central bank will hold rates steady, according to CME's Fedwatch Tool. Expectations for a 50 bps cut were at 29.3% a month ago.
The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB fell 2.4 basis points to 4.014%.
Comments from Fed officials, including Chair Jerome Powell, have signaled a shift in focus from combating inflation to labor market stability while also being deliberate in the path of future rate cuts.
The yield on the 30-year Treasury bond US30YT=RR slipped 3 basis points to 4.298%.
Atlanta Federal Reserve President Raphael Bostic said late on Tuesday he penciled in just one more interest rate reduction of 25 basis points this year when he updated his projections for last month's U.S. central bank meeting.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR, seen as an indicator of economic expectations, was at a positive 7.4 basis points.
The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 1.8 basis points to 3.938%.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.219% after closing at 2.226% on Oct. 15.
The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.273%, indicating the market sees inflation averaging about 2.3% a year for the next decade.
Monthly change in US Import Price Index https://reut.rs/3UaJsr9
Reporting by Chuck Mikolajczak; Editing by Andrea Ricci
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