US Treasury yields surged after a softer-than-expected US inflation report, with the 10-year note yield inching up over two basis points to 4.495%. This softness in April’s Consumer Price Index (CPI) defied expectations of a tariff-driven rise, hinting the May figures might better capture these effects.

The headline CPI rose 0.2% month-on-month, falling short of the anticipated 0.3%. Annually, it increased 2.3%, slightly down from March’s 2.4% and below forecasts.

Impact On Markets

Core CPI saw a 0.2% rise last month, consistent with March’s figures, maintaining a 2.8% year-on-year increase. Meanwhile, real yields climbed to 2.21%, impacting gold prices negatively.

A US-China trade pause led to a downturn in expected Fed rate cuts by reducing duties, affecting traders’ expectations. The market now predicts only 52 basis points of easing, down from the prior 76.

Interest rates, charged by financial institutions on loans, influence currency strength and gold prices. Higher rates make a currency more attractive, but weigh on gold due to increased opportunity costs. The Fed funds rate, a crucial measure in financial markets, shapes monetary policy expectations.

The data released has thrown traders a bit of a curveball. Despite inflation coming in a touch lighter than previously forecasted, Treasury yields unexpectedly edged higher. Typically, we’d expect yields to drift lower when inflation shows signs of cooling. But that didn’t happen here.

Short Term Market Predictions

What this suggests is that while April’s Consumer Price Index may have undershot expectations, markets aren’t confident this will be a long-term trend. There’s a reasonable chance investors are already looking beyond April, wondering whether May or June data will reveal more of the expected pressure from tariffs or supply disruptions—factors that usually take a bit of time to filter through. April’s dip in the headline rate also doesn’t fully erase the broader concern that inflation might be sticky in certain categories, especially at the core level, which refuses to budge below 2.8%.

Real yields—those adjusted for inflation—pushed higher as well, edging closer to multi-year highs. When this happens, it tends to pull liquidity out of some non-yielding assets, especially gold, which saw lower demand as the cost of holding it increased. Given our focus, we’ve seen this feed into option premiums and forward curves in commodity-linked products, particularly those tied to precious metals.

The reduction in expected rate cuts is not a subtle one either. Markets having retraced more than 20 basis points in their Fed easing expectations tells us participants are factoring in a possible delay, or even scaling back, of policy adjustments. The earlier assumption that the Fed might feel comfortable moving soon is no longer in play. Though the Fed hasn’t directly tightened the screws any further, the market is doing some of the heavy lifting for them.

From our view, the market has turned towards a more cautious stance, especially in terms of short-dated rates pricing. Forward curves are flatter, particularly in the 6-to-18-month horizon. Those positioned for steep easing in the latter half of the year are now facing headwinds, with volatility likely to pick up into the FOMC’s next projections update.

Currency desks will be watching incoming data with sharper attention. A stronger dollar, stemming from rising yields and narrower policy differentials, affects carry trades and hedging costs. This movement also underscores a general uptick in risk aversion. In options strategies, skew has begun tilting again as more participants seek downside protection against sudden rate repricing.

This adjustment across the fixed income strip means we need to reassess short gamma positions, particularly in the belly of the curve. While vol remains within familiar bounds, positioning dynamics are shifting. Hedging demand may increase and with US data still the fulcrum for short-term moves, it’s likely we’ll see a further re-adjustment in open interest through the end of the month.

Now that easing bets have been pulled back, attention will return to corporate credit spreads, funding costs, and demand for liquidity across short-term instruments. If real yields continue upward without strong growth data to justify them, stress may show up in risk assets. When evaluating where to allocate or hedge, one can’t ignore the signals now flashing in fixed income pricing.

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