The spark came from fresh figures on consumer and producer prices that indicated a slowdown.
Not everything was quiet. The same week that inflation data soothed bond markets, oil prices took off.
The cause was fresh US military strikes on Iran, which raised fears about supply disruptions in a key oil-producing region.
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Despite the oil price spike, Treasury prices managed to rise this week because cooler inflation reports outweighed the energy market turmoil.
"Following the inflation data earlier this week, markets priced out some probability of hikes, particularly in the near-term," said Molly Brooks, US rates strategist at TD Securities.
The contrasting moves in bonds and oil highlight how different factors are influencing markets. While energy prices can spark inflation fears, the bond market is currently laser-focused on the core inflation measures that the Fed monitors most closely. The recent data suggest that the central bank's tightening cycle may be near its end, even as geopolitical risks remain.
Historically, sharp oil price increases often fuel broader inflation worries, but the bond market's calm response this week reflects its singular focus on core inflation - the Federal Reserve's preferred gauge that strips out volatile food and energy components. The latest reports showed that both consumer and producer prices decelerated, reinforcing the narrative that underlying price pressures are cooling. With the Fed now in a communications blackout ahead of its July 28-29 meeting, traders have little new data to challenge that view, leaving the bond market comfortable with the current pricing that assigns only a 15% probability to a rate hike next month.
The bond market's subdued response to the oil jump fits a trend in which yields have become less reactive to energy price spikes, mainly due to the Fed's emphasis on core inflation offering a more definitive policy signal.
Looking ahead, the Federal Reserve's upcoming meeting will be closely watched. With the communications blackout in effect, traders have no fresh Fed commentary to digest, making the incoming economic data the primary driver. The cooler inflation prints have shifted expectations, but the hawkish voices from regional Fed presidents signal that the debate within the central bank is far from settled. Investors will need to weigh the risk of a delayed rate cut against the potential for further easing in price pressures.
But the longer-term picture is less clear. The group of Fed officials advocating for higher rates has grown, with even previously dovish figures such as Christopher Waller changing their positions. Still, both Hammack and Logan were already considered hawkish. Beth Hammack, president of the Cleveland Fed, wrote on LinkedIn Friday that she remains most worried about stubbornly high inflation. Dallas Fed President Lorie Logan stated Thursday that the central bank needs "modestly higher interest rates."
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