Treasury yields dropped on Wednesday after data showed consumer price increases came in below economists' forecasts in June, raising expectations that the Federal Reserve is nearing the end of its rate hiking cycle.
US consumer prices registered their smallest annual increase in more than two years, with the Consumer Price Index (CPI) rising 0.2% last month for an annual gain of 3.0%.
Core CPI increased 0.2% in the month, the first time in six months that it did not post monthly gains of at least 0.4%. In the 12 months through June, the core CPI rose 4.8%.
"The CPI report has come in lighter than expected both on the headline and on the core, and the markets are reacting in a positive fashion to that report," said Art Hogan, chief market strategist at B. Riley Wealth in Boston.
"Its policy implications are clear that the Fed is at or near the end of this rate hike cycle," he added.
Benchmark Figure Falls
Benchmark 10-year note yields dropped to 3.923% from around 3.945% before the data.
They are down from an eight-month high of 4.094% hit on Friday.
Interest rate-sensitive two-year yields fell to 4.786% from around 4.845%.
They reached 5.12% on Thursday, the highest since June 2007.
Forecasts
The inversion in the yield curve between two-year and 10-year notes narrowed to minus 87 basis points (bps), from around minus 91 bps before the data.
Fed officials have indicated that they expect to hike rates by another 50 bps as they tackle persistent price pressures, but traders are pricing in only around 32 bps of further tightening.
Fed funds futures traders now expect the fed funds rate to peak at 5.395% in November from 5.07% now. They had seen the rate rising to 5.410% before the CPI data.
Read More: US Consumer Price Increases Slow In May
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