The yield on the US 10-year Treasury note fell to 4.51% on Friday, following a retreat of around 6 basis points (bps) on Thursday. This decline was driven by the latest PCE inflation figures, which provided investors with further relief, suggesting that the Federal Reserve still has room to cut rates this year.

PCE Inflation Data and Rate Cut Expectations

Core PCE prices, the Fed's preferred measure of underlying inflation, slowed in April from March. Meanwhile, both the headline monthly and the annual rates remained steady, matching market forecasts. These figures have significantly influenced market expectations regarding potential rate cuts by the Fed.

Rate Cut Odds

The odds for a rate cut have increased notably, with the probability of an ease this year rising to:

• 50% for September (up from 49%)
• 63% for November (up from 62%)
• 82% for December (up from 81%)

These revised probabilities reflect the market's growing anticipation of a shift towards a more accommodative monetary policy by the Fed.

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Bond Market Volatility

The bond market has experienced considerable volatility recently. A significant bond sell-off occurred at the beginning of the week, spurred by poor demand in 2-, 5-, and 7-year Treasury auctions and hawkish remarks from some Fed officials. These auctions indicated weak investor appetite for mid-term US debt, contributing to rising yields.

Economic Data Impact

However, the yield rally paused later in the week due to several economic factors:

• A downward revision in GDP growth and PCE prices for the first quarter (Q1)
• A higher-than-expected number of initial claims for unemployment benefits

These factors have contributed to a more cautious outlook among investors, balancing the earlier sell-off and leading to the current decline in yields.

Future Outlook

The trajectory of the US 10-year Treasury yield will continue to be influenced by upcoming economic data releases and the Federal Reserve's policy decisions. Investors are closely monitoring indicators that could signal changes in the Fed's stance on interest rates, including inflation metrics, GDP growth, and labor market conditions. The interplay between these factors and market expectations will determine the direction of Treasury yields in the near term.

Conclusion

In conclusion, the US 10-year Treasury yield fell to 4.51% on Friday, reflecting the market's response to the latest PCE inflation data. The slowdown in Core PCE prices has heightened expectations for potential Federal Reserve rate cuts later this year, with increased odds for easing in September, November, and December. Despite recent volatility in the bond market, driven by poor Treasury auction demand and mixed economic data, the outlook remains cautious as investors await further economic indicators and Fed signals.

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