For most of the year, bond investors were confident that the Federal Reserve would resume rate cuts in September. However, recent doubts have emerged, intensifying attention on the upcoming inflation data. This data will help shape expectations for the Fed's next move and determine whether U.S. Treasuries can maintain their strong performance from the first half of the year, which was the best in five years.
According to CreditSights' Zachary Griffiths, the CPI data could set the tone for the Fed's policy direction and market risk sentiment for the rest of the year. Strong employment data released in early July has led traders to rule out a rate cut at the Fed's upcoming meeting, with a 70% probability now placed on policy easing in September, a shift from earlier expectations.
There are signs of increasing price pressures amid tariff measures, which could further question a September rate cut and stimulate investors preparing for rising yields. Conversely, moderate data could renew bets on near-term monetary easing. Brandywine Global's Tracy Chen suggests that the yield curve might steepen due to long-term bonds' sensitivity to inflation, government spending, and foreign demand changes.
Before the Fed's September decision, two CPI reports will be released. Fed Chair Jerome Powell has indicated the need for more time to assess tariff impacts before any rate cuts, maintaining patience despite pressure from President Trump to lower borrowing costs.
