(Bloomberg) -- Bond traders added to wagers that the Federal Reserve will cut interest rates before the end of this year after a report signaled easing inflation pressures.

Swaps linked to Fed meetings reflect an approximately 80% chance of a quarter-point hike next month following consumer-price data released Wednesday, after that probability fell to a little over two-in-three earlier. Swap pricing also showed expectations for the effective fed funds rate in December to be nearly a half point below the current 4.83% level, a deeper degree of easing than anticipated late Tuesday.

Bets on easier policy by year-end did fade from extremes seen earlier in the session, triggering a rebound in Treasury yields as well. Two-year yields were little changed around 4.02% after plunging as much as 15 basis points right after the CPI report. Comments from Richmond Fed President Thomas Barkin contributed to the reversal as he said there was more work to be done to get core inflation down. 

“Inflation is still high, but it has peaked and if shelter is turning, some of the pressure on the Fed to keep hiking will decline,” said Priya Misra, global head of rates strategy at TD Securities.

The year-on-year increase in the CPI measure fell to 5% from 6%. That was below economist’s estimates of 5.1%. A core measure that strips out food and energy came in at 5.6%, up from the prior month reading of 5.5%, but in line with economist estimates.

Bond traders will look next to the minutes of the latest Federal Open Market Committee meeting due at 2 p.m. in Washington. The US Treasury auction cycle also continues Wednesday, with a sale of $32 billion of 10-year notes. The debt saw mild demand with the yield on the sale coming about 2.1 basis points above the level on the when-issued security just before the auction bidding completed. While this so-called auction tail is a negative sign on demand, other measures — including the bid-to-cover ratio were “decent”, according to Ben Jeffery at BMO Capital Markets.

Treasury 10-Year Auction Tails Despite Cheapening Before Sale

Benchmark 10-year yields after the auction capped a rise on the day that had begun after an initial post-CPI release swoon that took the rate to as low as 3.34%. The yield was at about 3.45%, up around 2 basis points at 1:25 pm New York time.

The swings in yields Wednesday were in line with the outsized volatility in the Treasury market that has been seen all year as traders’ outlook for Fed policy has shifted sharply.

“Yields have been more than a bit volatile recently,” said Andrew Patterson, senior international economist at Vanguard Group Inc. “Focusing on market pricing is helpful but doesn’t present the whole story. And today’s data shows core inflation actually picking up this month on a year-on-year basis and that says to us that the Fed still has more work to do.”

Not everyone is buying into wagers on Fed easing this year. Rate cuts are especially unlikely in 2023 if the economy proves to slow only gradually, said Jay Bryson, chief economist at Wells Fargo & Co.

“If we have a soft landing, I could see the inflation rate getting stuck at 3 to 3.5%,” Bryson said on Bloomberg Television. If the Fed still needs to get inflation “back down to 2% you are not going to see rate cuts by the end of the year. So, I have a bit of a disagreement with where the 2-year yield is right now.”

--With assistance from Michael Mackenzie and Mark Tannenbaum.

(Corrects to remove reference to retracted story on Treasury futures volumes.)

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