Treasury yields stabilized on Wednesday after the latest Consumer Price Index report showed inflation continuing its gradual descent, meeting economist expectations and reinforcing hopes that the Federal Reserve's tightening cycle has reached its peak.
The 10-year Treasury yield settled at 4.12%, down 5 basis points from the previous session. The 2-year yield, which is more sensitive to Fed policy expectations, fell to 4.35%, narrowing the closely watched yield curve inversion.
Inflation Continues to Cool
The CPI rose 0.2% in December, bringing the year-over-year increase to 2.9%, down from 3.1% in November. Core inflation, which excludes volatile food and energy prices, also showed improvement at 3.2% annually.
"This report is exactly what the Fed wanted to see," said Michael Chen, fixed income strategist at JPMorgan. "It supports the case for rate cuts in the second half of the year while not suggesting any urgency to act immediately."
Market Implications
The bond market's reaction suggests investors are increasingly comfortable with the soft landing narrative. Fed funds futures now price in approximately 75 basis points of rate cuts by year-end, with the first cut expected in June.
Corporate bond spreads tightened following the data, with investment-grade credit spreads reaching their narrowest levels since early 2024. High-yield bonds also rallied, reflecting improved risk appetite.
Looking ahead, market participants will focus on upcoming Fed speakers and the January employment report for further clues about the central bank's policy path.