(Bloomberg) -- Treasuries gained after a delayed report on inflation showed consumer prices rose less than expected, reinforcing bets the Federal Reserve will cut interest rates next week.
Yields on two-year notes — which are most sensitive to changes in monetary policy — dipped as much as five basis points. Yields on benchmark 10-year notes fell back below 4% after the reading, approaching their lowest levels since April.
The consumer price index for September — delayed by the federal government shutdown — showed core prices rose 0.2% on a monthly basis, less than the 0.3% expected by economists. Headline inflation rose 3.0% on an annual basis, still higher than the Fed's target.
Interest-rate swaps signaled traders all but fully priced in a quarter-point rate cut at the Fed's meeting next week, followed by another reduction in December.
Traders are betting that the Fed will cut the rate by a total of 120 basis points over the next 12 months. That would bring the benchmark borrowing costs to 2.9%, below the 3% level that is considered as neutral, or a level that neither stimulates or restrict the economy.
"It's definitely an encouraging report," said Zachary Griffiths, head of investment-grade credit and macro strategy at CreditSights. "It's clear to us the Fed would like to take the policy rate back toward neutral to address weakness in the labor market. Today's CPI report affords them the opportunity to continue easing in the near term."
Through Wednesday, Treasuries returned 1.3% in October, on track for the best monthly performance since February, according to a Bloomberg index. Multiple drivers fueled the gains, from the potential for the shutdown to dent growth to resurgent trade tensions between the US and China, as well as several high-profile bankruptcies and a narrowing federal budget deficit.
Prior to Friday, some traders were concerned that an upside surprise would set back the bond market. Interest-rate strategists at Barclays Capital this week recommended exiting a bullish position in Treasuries, recommended since June, based in part on the potential for the September CPI data to erode profits.
(Updates with additional context starting in fourth paragraph.)
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