Treasuries Decline Amid Weakening Case for Federal Reserve Rate Cut Following Inflation Report

Treasuries Fall as Inflation Worries Erode Rate Cut Bets

The US Treasury market experienced a setback on Friday as inflation concerns stemming from the ongoing war on Iran and the potential for escalation eroded bets that the Federal Reserve will lower interest rates this year. The rise in yields began in early US trading after the release of consumer prices data for March, which reflected the impact of the war.

The consumer price index (CPI) rose 0.9% in March, the most in nearly four years, driven by a surge in gasoline prices after the war curtailed the supply of oil via the Strait of Hormuz. The increase matched economists' median estimate, while prices excluding food and energy (core CPI) increased 0.2%, less than the 0.3% estimate.

| Indicator | March 2026 | Economists' Estimate | | --- | --- | --- | | CPI | 0.9% | 0.9% | | Core CPI | 0.2% | 0.3% |

The University of Michigan's consumer sentiment gauge for April fell to a record low, highlighting the risk to US economic growth stemming from rising consumer prices. Consumer inflation expectation gauges included in the sentiment report rose more than economists estimated.

The war has effectively stopped the flow of oil from the region via the Strait, resulting in a surge in oil prices. Since the US attacked on February 28, US benchmark West Texas Intermediate crude futures are up nearly 50%. The price tumbled from a multiyear high on April 8 following the ceasefire announcement but has resumed rising.

The oil price surge has walloped the bond market, both by driving up inflation expectations and via the logic that the Fed is unlikely to cut interest rates, even in response to signs of weakness in the US labor market, against a backdrop of quickening inflation.

Fed policy makers have a 2% "longer-run" target for a different measure of inflation. That measure rose 3% from a year earlier in February and will be reported for March on April 30, the day after the central bank's next scheduled rate decision.

| Indicator | February 2026 | Forecast for March 2026 | | --- | --- | --- | | Inflation Measure | 3% | 3.3% |

The consumer sentiment slump reflected the expectation that inflation will be 4.8% over the next year. The US national average retail price for regular unleaded gasoline topped $4 a gallon at the end of March, up from under $3 at the end of February.

Rising yields in the Treasury market in March produced its biggest monthly loss in more than a year. Before the war started, traders were pricing in at least two quarter-point rate reductions by the Fed in 2026. As oil prices rose, they scrapped that view and briefly wagered that the Fed's next move would be a rate increase.

The US two-year yield, which ended February at 3.37%, rose at least 10 basis points in a day four times in March. Since peaking at 4.02% on March 27, it fell five basis points in a day three times. It rose Friday to 3.80%. The Fed's rate target band has been 3.5% to 3.75% since December.

The ceasefire agreed to by US President Donald Trump remained broadly intact Friday, though the Strait of Hormuz was still effectively shut. The US and Iran are scheduled for direct talks in Pakistan over the weekend.

Nuveen's Anders Persson said the uncertainty warrants a cautious approach to longer-term bonds, and favors those that mature in three to seven years. By contrast, Fort Washington Investment Advisors' Dan Carter said the risks to economic growth favor risk-taking in bonds, hedged with inflation-protected securities.