Treasury Yields Little Changed on Friday

The yield on the US 10-year Treasury note was little changed at 4.39% on Friday and is down 7 basis points on the week, after a broadly in-line PCE inflation report prompted investors to slightly scale back expectations for Fed rate hikes this year. Headline PCE inflation rose to 4.1%, while the core rate climbed to 3.4%, the highest since 2023 and well above the Fed’s 2% target, though both readings matched forecasts. Meanwhile, markets continue to monitor developments in the Middle East. Oil prices extended recent declines, even as geopolitical tensions resurfaced following an attack on a cargo ship near the coast of Oman in the Strait of Hormuz. Fed rate expectations remain elevated, with markets pricing in three rate hikes this year, and the probability of the first move in September standing at around 62%.

The yield on the 10-year US Treasury note remained around 4.37% on Friday, hovering near seven-week lows as a benign inflation report reduced expectations for multiple Federal Reserve rate hikes this year. The latest US PCE inflation data came in broadly in line with forecasts, and although inflation remains well above the Fed's 2% target, the report eased concerns about a sharper-than-expected acceleration in price pressures. Even so, markets are pricing in an 80% chance of a Fed rate hike in December following last week's hawkish pause, while the probability of a September increase stands at around 63%. New York Fed President John Williams also said on Thursday that inflationary pressures are expected to moderate this year but remain too high.

The yield on the 10-year US Treasury note fell to below 4.40% on Thursday, the lowest in seven weeks, as lower inflation concerns limited the likelihood of multiple rate hikes by the Fed this year. The core PCE price index was softer than expected in May and the headline rate increased less than expected. The results softened pro-inflationary risks as fresh oil supply from the Middle East lowered energy prices. The US and Iran signaled progress in talks after their memorandum of understanding halted the naval blockade, and tanker flows through the Strait of Hormuz picked up. Rate futures showed that market trimmed positions that reflect more than one rate hike by the Fed this year. Still, underlying inflation gauges remained elevated and both personal spending and income beat expectations. Evidence of robust growth and labor backdrops maintained the outlook of a hike by the Fed, aligned with the hawkish pivot from the last FOMC projections.