Investors are signalling the Federal Reserve (Fed) will cut interest rates just twice this year, starting in September, after a fresh round of hot inflation sent Treasury yields soaring to 2024 highs.

This turn of events was unthinkable at the start of the year, when the consensus view was for six cuts totalling 1.5 percentage points, beginning in March. Swap contracts currently anticipate the Fed’s rate will end the year only about 40 basis points lower than its current level of 5.33%. Options traders added bets on the Fed cutting just once this year, and Wall Street banks began revising their forecasts.

Yields across most of the maturity spectrum were higher by around 20 basis points in late afternoon trading, with the policy-sensitive two-year note up by nearly 23 basis points to 4.97%. The benchmark 10-year note’s yield topped 4.5% for the first time since November.

The third straight higher-than-expected measure of underlying US inflation followed another blowout month of job creation in March. As recently as early March, markets were pricing in three cuts from the Fed in 2024, starting in June.

“It looks like we are in more of a world where inflation is levelling out around 3% and that will bias the Fed to stay on hold,” said Campe Goodman, fixed income portfolio manager at Wellington Management Co, a sub-advisor to Hartford Funds.

Nearly everyone - from Wall Street strategists to Fed officials themselves - is being forced to, once again, reckon with signs of economic resilience and sticky consumer price pressures despite overnight interest rates more than twice as high as the putative neutral level.

While Goldman Sachs Group Inc economists pushed back their forecast for a cut to July from June, their counterparts at Barclays plc said they now just expect one reduction this year. Former US Treasury Secretary Lawrence Summers, a Bloomberg Television contributor, said markets “have to take seriously” the chance the central bank’s next shift is a hike.

“Bottom line is that this data means for the Fed there will be one or two cuts at most this year, and right now they just have to be patient,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “Generally, the trend in yields is still higher, and we don’t want to fight the trend. But I’m not in the camp that we will make it to 5% in the 10-year.”

The Treasury yield increases were the biggest in months. The yield on the 10-year Treasury note surged Wednesday by as much as 20 basis points to 4.56%. Wellington’s Goodman expects it to stay in a range of 4.5% to 4.75% as long as inflation lingers near 3%.

Yields on five-year Treasuries briefly exceeded those on 30-year bonds for the first time since September.

Fed policymakers have said that while they expect to cut rates this year, they want to be more confident that inflation is on a sustainable path toward their 2% target before beginning the process. The rate they target - different from the CPI - was 2.45% in February, down from a peak of 7.1% in 2022. The March CPI readings provide scant basis for increased confidence in the trend.

“What the market is finally realising is it’s going to be very hard for inflation to keep coming lower,” said Leah Traub, portfolio manager at Lord Abbett & Co. “Unless we get very sudden weakness in the economy, we just don’t see the Fed cutting soon.”

The US Treasury department sold US$39 billion of 10-year notes at a yield more than three basis points higher than where it was trading at bidding deadline, a sign of weak demand. It was among the worst 10-year auctions by that measure in the past five years.

Treasury yields remained near their highest levels of the day after the release of the minutes of the most recent meeting on interest rates in March. The meeting was notable for producing an unchanged median forecast for three rate cuts this year, which was then the market’s base case.

“Seems like this will solidify the idea of high-for-longer and keep upward pressure on rates in the near term,” said Zachary Griffiths, head of US investment grade and macro strategy at CreditSights. “From a longer-term perspective we think this back up in rates presents an opportunity to add duration at attractive levels.”

  - Bloomberg