US Treasuries slipped Tuesday as traders looked to December’s inflation data for clues on how quickly the Federal Reserve may resume lowering borrowing costs this year.
The yield curve steepened as longer-dated notes underperformed, with the 30-year yield rising three basis points to 4.85% ahead of an auction that will see the US Treasury offer $22 billion of bonds in this maturity later Tuesday. The two-year yield was one basis point higher at 3.55%.
Tuesday’s inflation release marks a return to greater normality after the extended US government shutdown last year distorted the readings for October and November. But that’s left most economists guessing how prices may have evolved between now and then, according to Julien Lafargue, Chief Market Strategist at Barclays Private Bank.
“There is therefore a strong possibility that the December reading surprises markets, with both the direction and the magnitude of this possible surprise having an impact on the market’s reaction,” Lafargue said.
US breakeven rates, which measure the average rate of inflation, have climbed to the highest since November, fueled by an 8% surge in oil prices since the middle of last week.
After three rate cuts by the central bank since September, traders see the next reduction in mid-2026, with another to follow in the fourth quarter. Money markets see no chance of a cut when policymakers next meet at the end of this month.
What Bloomberg Strategists Say...
“It will be hard for Tuesday’s US inflation data to come in on the dovish side, tilting risks toward higher front-end yields. Traders and the Fed both look to have accepted that inflation will be above target through 2026. It’s also helped that figures in the latter half of 2025 surprised to the downside.”
— Skylar Montgomery Koning, macro strategist.
The US core consumer price index, regarded as a measure of underlying inflation because it strips out volatile food and energy costs, is seen rising 2.7% in December from a year earlier. That’s just a touch more than the 2.6% annual advance in November, which was the smallest since early 2021.
On a monthly basis, economists expect 0.3% increases in both overall and core prices. Money markets have gradually pared expectations for Fed interest-rate cuts in 2026 over the past week on signs that the US economy is performing robustly, with the outlook of a first reduction moving from April to June.
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