(Bloomberg) — For much of this year, bond investors were all but certain that the Federal Reserve would resume cutting interest rates by September.
Most Read from Bloomberg
Lately, that confidence has been wavering. And those nascent doubts add to the focus on inflation data this week that will help set expectations for the Fed’s next steps. It will also dictate whether Treasuries can extend their solid first-half performance, which was the best in five years even after stretches of dizzying swings.
The CPI figures “could set the tone for the direction of the Fed and risk sentiment for the second half of the year,” said Zachary Griffiths, head of investment-grade and macroeconomic strategy at CreditSights.
A batch of strong jobs figures in early July led traders to rule out a rate cut at the Fed’s gathering this month. They also now see about a 70% chance that officials ease at the central bank’s September meeting, whereas a reduction by then was viewed as a lock as recently as late June.
That backdrop raises the stakes for Tuesday’s release of the June consumer price index, which according to Barclays Plc strategists has averaged the biggest absolute surprise of any month in recent years.
Signs that price pressures are building amid President Donald Trump’s tariff rollout would risk raising further questions around a September cut, and may buoy those positioning for higher yields. Conversely, a tame report could re-energize wagers on near-term monetary easing.
“We should be able to see the effect of the tariff war” in the coming inflation reports, said Tracy Chen, a portfolio manager at Brandywine Global Investment Management. “I don’t see how the Fed can cut in September. The resilience of the job market and the frothy risk asset market do not justify the cut.”
Her view is that the yield curve is likely to steepen, given longer maturities’ vulnerability to a pickup in inflation, the prospects of government spending and changes in foreign demand.
Tariff Divide
The Fed will get two further CPI releases before its September decision. Chair Jerome Powell has said that officials need more time to gauge the impact of tariffs before cutting rates, signaling patience in the face of Trump’s relentless pressure on him to lower borrowing costs.
The levies have driven an emerging divide among policymakers, and getting clarity around the issue has become even tougher after the president delayed the deadline for punitive tariffs on trading partners until Aug. 1.
The upshot is that traders have little conviction about where the world’s biggest bond market goes next, leading them to unwind big bullish bets over the past week.
That sense of limbo leaves yields range-bound for now, with rates on two-year notes, the maturity most sensitive to Fed expectations, fluctuating between roughly 3.7% and 4% as they have since early May. A measure of expected volatility in Treasuries, meanwhile, has tumbled from its tariff-fueled April heights to the lowest in more than three years.
Economists surveyed by Bloomberg expect the CPI report to show annual core inflation accelerated to 2.9% in June, the highest since February.
What Bloomberg strategists say…
“Treasury yields are at the midpoint of the 2025 range” ahead of this week’s inflation and consumer data. “Anticipation of those data sets is likely to keep bond rates traversing a familiar range with dips being bought and rallies sold for now.”
— Alyce Andres, FX/Rates strategist, Markets Live
For the full analysis, click here.
Those worried about an extended Treasuries slump on hot inflation data may take solace from last week’s 10- and 30-year auctions, which showed solid demand, suggesting buyers may step in and limit any selloff.
Since easing in December, policymakers have held borrowing costs steady. Powell has called the current level of rates “modestly restrictive,” and the median forecast in the Fed’s so-called dot plot unveiled last month was for two cuts by year-end.
However, seven officials saw no reductions in 2025, while 10 saw two or more. Fed Governors Christopher Waller and Michelle Bowman have signaled a desire to resume cutting as soon as this month.
“We remain concerned clearer signs of tariff pressure on consumer prices will emerge, forcing a repricing of the path of Fed policy in the near-term, pushing Treasury yields higher across the curve in a modest bear-flattener,” said Griffiths at CreditSights.
Even if the next cut comes after September, it doesn’t necessarily derail the path of easing, said John Lloyd, global head of multi-sector credit at Janus Henderson. That notion may also curb any bond declines, he said.
“We have two cuts priced in through December,” he said. “Could one of those come out? Yes, but it probably just gets moved into the first quarter of next year.”
What to Watch
-
Economic data:
-
July 15: Empire manufacturing; consumer price index, real average hourly earnings
-
July 16: MBA mortgage applications; producer price index; New York Fed services business activity; industrial production; manufacturing (SIC) production; capacity utilization; Fed Beige Book
-
July 17: Retail sales; import/export price indexes; initial jobless claims; Philadelphia Fed business outlook; business inventories; NAHB housing price index; net long-term TIC flows
-
July 18: Housing starts; building permits; University of Michigan sentiment and inflation expectations
-
Fed calendar:
-
July 15: Vice Chair for Supervision Michelle Bowman; Governor Michael Barr; Richmond Fed President Tom Barkin; Boston Fed President Susan Collins; Dallas Fed President Lorie Logan
-
July 16: Barkin; Cleveland Fed President Beth Hammack; Barr; New York Fed President John Williams
-
July 17: Governor Adriana Kugler; San Francisco Fed President Mary Daly; Governor Lisa Cook; Governor Christopher Waller
-
Auction calendar:
-
July 14: 13-, 26-week bills
-
July 15: 6-week bills
-
July 16: 17-week bills
-
July 17: 4-, 8-week bills
Most Read from Bloomberg Businessweek
©2025 Bloomberg L.P.
