Fed Rate-Hike Odds Fall Below 40% After Soft Inflation Data; Short-Term Treasurys Rally

Traders cut bets on an October Federal Reserve rate hike after U.S. inflation data came in below expectations, sending short-dated Treasury prices higher on Wednesday. Interest-rate swaps showed the probability of a hike next month falling to about 36%, down from roughly 50% before the release. The 2-year Treasury yield dropped nearly 5 basis points to 4.83%, its lowest in more than a week, reflecting diminished expectations for near-term tightening. The Fed's preferred PCE price index rose 0.3% on the month, while core PCE, excluding food and energy, increased 0.2% — below the 0.3% median estimate in a Bloomberg survey of economists. The data also included adjustments to how inflation is calculated, keeping market interpretation cautious. Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, said the report offered investors relief but that methodology changes left the market unwilling to push bond prices too far.