bond yields fell on wednesday but moves were meagre and trading was thin as the market awaited the latest gauge of us inflation the 10year to 2year spread of minus 46 basis points means the yield remains near its most inverted in 20 years potentially a strong signal of an economic downturn the us consumer price index cpi report due at 830 am eastern is the main focus for fixed income investors bond bulls will be hoping that the previous report covering june which showed yearonyear cpi at a 40year high of 91 will mark the peak for headline inflation consensus forecasts show the headline dropping to 87 because of declining energy prices hopes that the pace of inflation may soon start to wane have helped benchmark 10year treasury yields fall from roughly 35 in june to 2778 but analysts warn that the market will need to see evidence that core inflation which strips out volatile commodities like food and energy is also starting to satabilise for the bond rally to be maintained economists forecast yearoveryear core cpi will inch up from 59 in june to 61 in july jan nevruzi us rates strategists at natwest markets said that if the core figure matched economists’ forecasts then investors may price in a slightly less hawkish fed “as far as market reaction goes i think a print in line with those forecasts would bring the september fed expectations closer to 50 basis points while anything above would raise the 2022 terminal profile by 1520bps but pricing more cuts from q2 23” but nevruzi warned that such a view may be premature “there is more inflation data before the september meeting and a lot can change but those sound like some potential kneejerk reactions to me a oneoff sharp drop in cpi at this point should not mean that much to the fed as they need to see at minimum a consistent multimonth trend to turn around while acceleration in inflation means that a lot more has to be done on the tightening front” nevruzi wrote in a note to clients alan ruskin macro strategist at deutsche bank said in a note “in terms of reactions the market will initially get more excited by a downside core cpi surprise than an upside surprise especially as it relates to risk appetite a downside surprise plays to ‘hopes’ that an oilfood commodities peak plus slower demand will filter quickly into us inflation data this is probably wishful thinking as inflation typically lags demand by at least a year” ruskin added that a softer cpi reading nevertheless will support the ‘peak inflation theme’ “it will also play to the market’s recent proclivity to buy risk dips and will be a broadbased negative for the usd notably versus high beta em” markets are currently pricing in a 675 probability that the fed will raise interest rates by another 75 basis points to a range of 300 to 325 after its meeting on september 21st the central bank is expected to take its borrowing costs to 366 by april 2023 according to fed funds futures