Bond Watch: US rate cut in September ‘close to 100%’

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.            
 
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US inflation drops more than expected  

Inflation in America dropped to 3% in the year to June, below May’s rate of 3.3% and less than forecasts of 3.1%. 

The better-than-expected reading means that markets now expect a Federal Reserve rate cut in September, which has led to US bond yields falling.  

Deutsche Bank strategist Jim Reid said: “Markets got another boost yesterday, as the latest US consumer price index (CPI) print surprised on the downside once again, which led to growing hopes that inflation was finally being tamed.  

“Of course, it’s worth remembering that one report doesn’t make a trend, but recent months have brought some of the weakest inflation numbers since the current surge began in 2021, and it’s led to growing expectations that the Federal Reserve will finally be able to start cutting rates in the months ahead.” 

Inflation is now back in normal ranges across developed world economies. It is just 2% in the UK (for the year to May) and 2.6% in May. 

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This gives central banks scope to cut interest rates without fuelling further price growth, which would be good news for bond prices. The European Central Bank has already delivered one cut, with the US and UK banks set to follow suit soon.  

John Kerschner, a portfolio manager at Janus Henderson Investors, says that the US inflation print gives the Federal Reserve the “all-clear sign to start lowering interest rates later this year”, and adds that the odds of a rate cut at September’s meeting are close to 100%, according to the market. 

Kerschner also mentions that the market now expects three cuts by the end of January 2025. 

US government bonds yield a similar amount to UK government bonds, known as gilts. The 10-year US Treasury yields 4.2%, while the UK 10-year pays 4.1% a year.  

UK inflation figures for June are due out on 17 July.