"Inflation "hidden benefits" boost expectations of rate cuts, with the two-year US Treasury yield falling to a four-month low."

After the latest release of US inflation data was lower than market expectations, US bond prices collectively rose on Friday, with investors increasing their bets on the number of rate cuts by the Federal Reserve in 2026 and the market beginning to factor in a higher probability of a third rate cut this year. As a result, the yield on the two-year US Treasury bond, which is most sensitive to monetary policy, briefly dropped to 3.40%, down by as much as 6 basis points in a single day, hitting a new low since October of last year before partially rebounding. Interest rate futures indicate that traders are currently pricing in a loosening of about 63 basis points for 2026, equivalent to a close to 50% probability of a third 25 basis point rate cut by the end of the year. Just the day before, the market was only pricing in about 58 basis points of rate cut. Tiffany Wilding, an economist at PIMCO, stated in an interview that despite the inflation data appearing to be "in line with expectations" on the surface, the internal structure still released positive signals. "This will make the Fed more comfortable when it comes to rate cuts, and we believe that multiple rate cuts this year are a reasonable assessment." Data shows that the US core Consumer Price Index rose by 0.3% month-on-month in December, the largest increase since August of last year. This data was released by the US Bureau of Labor Statistics. Two days before the release, the delayed January employment report showed that the recruiting situation remained solid, with the unemployment rate unexpectedly falling. On one hand, the strength of the job market puts pressure on rate cut expectations; on the other hand, the recent sell-off in US stocks has supported US bond prices on Thursday due to safe-haven demand. After the release of the January employment data, traders no longer exclusively bet on rate cuts in the first half of the year, pushing back the timing of the first rate cut from the previously expected first half of the year to July. Some Wall Street banks that originally predicted a rate cut in March have also postponed their forecasts to a later point in 2026. Looking back at the policy level, the Federal Reserve cut rates three times in succession at the end of last year due to signs of cooling in the labor market, but chose to stand pat at the most recent rate-setting meeting. Several policymakers dissented in the last rate cut in December and emphasized multiple times that inflation levels were still relatively high, suggesting that it was not appropriate to further relax policy prematurely. The initial reaction in the US bond market on Friday gradually cooled down as investors began to reevaluate the overall signals released by a series of macroeconomic data this week. As of 9:00 AM New York time, bond yields across various maturities only slightly declined by 1 to 2 basis points. Aroop Chatterjee, Managing Director at First National Bank Securities, pointed out that the inflation data did not show any "substantial surprises," indicating that the Fed's focus would remain on the labor market. "The market may be overestimating the likelihood of the Fed cutting rates this year."