Traders cut Fed hike bets as oil and inflation cool

Bond traders reduced expectations for a Federal Reserve interest-rate increase this year as oil prices fell and inflation data showed signs of cooling.

Treasury yields declined by as much as six basis points across maturities. Long-term yields fell less as the US sold $25 billion of new 30-year bonds.

Oil dropped more than 3.5% at one point Thursday before paring the decline. The move reinforced investor optimism that US inflation may have peaked.

Weak July employment data had already prompted traders to scale back expectations for tighter policy.

Producer prices slowed in July, government data showed Thursday. Consumer-price data released a day earlier also indicated cooling inflation for a second consecutive month.

Markets placed the probability of a September rate increase below 40%. December contracts priced about 23 basis points of tightening, just short of a full quarter-point move.

Some Fed officials still argue that higher rates are needed. Cleveland Fed President Beth Hammack said inflation remains above the central bank’s 2% target.

The 30-year Treasury auction cleared at 5.216%, the highest yield for the maturity since 2001. Demand was slightly weaker than expected.

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