Higher US Treasury yields followed news on Middle East tensions and expectations of upcoming supply. Attention is now focused on the April US Consumer Price Index (CPI) and its effect on the US Dollar and rates pricing.
TD Securities forecasts core CPI at 0.38% month-on-month in April, compared with a 0.36% consensus. It expects headline CPI at 0.56% month-on-month, versus a 0.6% consensus.
April CPI Expectations
The forecast for core CPI is linked to a rebound in shelter prices tied to methodological adjustments. Oil prices are also expected to feed through into items such as airfares.
Core goods inflation is expected to stay subdued, with only modest pass-through from tariffs. Headline CPI is expected to be supported by strong petrol prices and a rise in food prices after a flat March.
Looking back to this time last year, we saw a lot of focus on Middle East tensions and Treasury supply, with all eyes on the April 2025 inflation report. The general expectation then was for a very firm CPI print, but the actual data came in slightly softer, with core CPI rising 0.3% that month. That downside surprise caused a brief rally in bonds, temporarily easing concerns about the Federal Reserve’s path.
Now, in May 2026, the setup feels similar but the underlying inflation problem is more stubborn. Recent data has confirmed this, as the March 2026 core CPI remained elevated at an annualized 3.7%, refusing to cool down as quickly as markets had hoped. This persistent inflation has forced a major repricing in rate expectations for the coming months.
Rates Volatility And Positioning
For derivative traders, this means the ‘higher for longer’ theme is firmly back in play. We are seeing a significant reduction in bets for a summer rate cut, with Fed funds futures now pricing in the first potential ease much later in the year, possibly not until the fourth quarter. This makes short-term interest rate options, like those on SOFR futures, critical for positioning against sustained high rates.
The energy component, a key factor in 2025, is also a concern again. With recent tensions in the Strait of Hormuz pushing Brent crude back toward $90 a barrel, the risk of another surge in headline inflation is increasing. This reinforces the view that any dip in yields should be viewed with skepticism.
Given this backdrop, implied volatility in the bond market is an area to watch closely. The MOVE Index, which tracks Treasury market volatility, has been climbing from its lows earlier this year. Traders should consider positions that benefit from sharp moves in interest rates, as upcoming inflation and jobs data could easily shock a market that is already on edge.
