U.S. Treasury yields fell on Tuesday after official data showed consumer inflation slowed more sharply than markets had anticipated in June.
The Labor Department's Consumer Price Index for June came in with a 3.5% year-over-year increase, down from 4.2% in May. May's reading had been the largest annual rise since April 2023. On a month-on-month basis, CPI decreased 0.4% in June after a 0.5% increase in May.
Economists polled by Reuters had forecast a 3.8% annual increase and a 0.1% monthly decline, making the actual figures a clearer deceleration than expected. The surprise in the data coincided with a pullback in the benchmark Treasury yield.
The yield on the 10-year U.S. Treasury note fell 3.1 basis points to 4.579%, trading as low as 4.525% during the session. That move marked the largest single-day decline for the 10-year since June 24.
Market reactions were partially tempered following remarks from Federal Reserve Chairman Kevin Warsh during testimony before the House Financial Services Committee. Warsh said that the day’s inflation reading does not demonstrate that the central bank has met its mandate for price stability. After his comments, yields pared some of their initial losses.
Overall, the inflation report led investors to reduce the probability they attach to an interest rate increase by the Federal Reserve in the near term.
Context and market reaction
The combination of a bigger-than-expected year-over-year slowdown in CPI and a monthly decline drove a retracement in Treasury yields, with the 10-year note recording its most notable single-session drop since late June. Market pricing subsequently shifted to reflect a lower likelihood of an imminent policy tightening from the central bank.
What remains uncertain
Comments from the Federal Reserve Chairman emphasizing that the data does not yet signal price stability introduced caution, and yields reduced some of their losses after his testimony. That exchange highlights lingering uncertainty about whether this inflation slowdown will be durable enough to alter monetary policy plans.
Investors and market participants continued to weigh the fresh CPI readings alongside signals from policymakers as they reassess near-term rate expectations.