Inflation Cools, Yields Continue To Climb: Why Markets Aren't Ruling Out A May Rate Cut

Back-to-back weaker-than-expected inflation reports are failing to calm the U.S. Treasury market, with bond yields climbing again on Friday and fueling speculation that a policy misalignment may soon force the Fed's hand.

In a Friday report, the Bureau of Labor Statistics showed that the Producer Price Index, or PPI—a key gauge of wholesale prices—fell 0.4% month-over-month in March, marking the largest decline since 2023. On an annual basis, producer inflation slowed to 2.7%, well below economists' estimates of 3.3% and down from 3.2% in February.

Stripping out volatile food and energy components, core producer prices fell 0.1% in the month and increased 3.3% on an annual basis, again undercutting forecasts.

Some of the sharpest PPI price declines in March included:

• Eggs for fresh use: -21.3%
• Fresh and dry vegetables: -13.0%
• Fruits and melons: -12.2%
• Gasoline: -11.7%
• Diesel fuel: -6.5%

The data followed Thursday's cooler-than-expected Consumer Price Index (CPI) report, which showed slowing price pressures at the consumer level.

Despite this cooling inflation backdrop, Treasury yields are rising. The 10-year yield climbed 7 basis points to 4.50%, while the 30-year yield rose to 4.92%, up 5 bps. Both have jumped around 50 basis points this week alone.

The popular 20+ Year Treasury Bond ETF TLT has fallen 7% since President Donald Trump‘s tariff announcement on April 2.

"These are numbers you only see in recession," posted the account @FrogNews on X. "With this kind of print, your Fed should be WAY more worried about deflation than inflation."

"Producer price pressures are easing faster than expected — a welcome sign for the Fed and markets hunting for disinflation proof," said Neem Aslam, chief investment officer at Zaye Capital Markets.

Some analysts see recent tariff-related behaviors distorting the data. Charles V Payne noted that “tariff talk influenced the tick higher in February CPI and PPI data because demand was pulled forward. So it’s very curious that such demand faded in March.”

Bond Vigilantes Aren’t Buying The Disinflation Story

Despite back-to-back disinflationary prints, Treasury yields have surged roughly 50 basis points over the week. That's counterintuitive. Typically, falling inflation would pull yields lower as traders anticipate looser monetary policy.

But the bond market isn't buying it—not yet.

Kathy Jones, chief fixed income strategist at Schwab Center for Financial Research, said the bond market reaction "is not overly impressed by the PPI report" and noted that while inflation is easing, market attention has shifted toward policy uncertainty and broader macro risks.

That theory gained traction as PPI components related to goods, especially airfares, posted stark declines.

Kevin Gordon, senior investment strategist at Charles Schwab, noted that components that matter most for the Personal Consumption Expenditures (PCE) price index – the Federal Reserve's preferred inflation gauge – saw a softness, indicating another upcoming benign inflation reading.

PPI Elements That Feed Into PCE:

Airline passenger services	-4.0%
Portfolio management	0.2%
Physician care	0.0%
Home health, hospice care	0.0%
Hospital outpatient care	0.3%
Hospital inpatient care	0.1%
Nursing home care	0.2%

The odds of a rate cut at the Federal Open Market Committee's May 7 meeting remain low, with markets assigning just a 25% chance of a 25-basis-point cut, according to CME FedWatch data.

However, the recent turbulence in Treasury markets and growing concerns over the dollar's stability may be early signals pushing the Federal Reserve to step in and ensure market liquidity.

The key question now is whether policymakers will respond to lagging inflation data or turn their attention to looming economic risks and uncertainties tied to trade policy and tariffs.

Read Next:

• ‘Economy Is Facing Considerable Turbulence:’ JPMorgan Chase CEO Jamie Dimon Cautions About ‘Negatives Of Tariffs And Trade Wars’

Image created using artificial intelligence via Midjourney.