The yields on U.S. Treasury notes have almost entirely retraced their surge following the release of the hotter-than-expected January inflation report.

This indicates a swift shift in investor sentiment amidst conflicting economic indicators.

The 10-year Treasury note saw a decrease to 4.21% during Thursday morning's trading in New York. This marks a five basis point drop after a six basis point decline the previous day. This movement erased the gains seen in the wake of the inflation data. Yields are back to their pre-report levels of approximately 4.17-4.18%.

Despite a higher-than-expected inflation rate for January, the anticipated impact on longer-dated maturities was short-lived. The 30-year Treasury note yield returned to 4.4%, aligning exactly with its position before the Consumer Price Index (CPI) announcement.

However, a slight uptick remains in the two-year note, which, despite falling to 4.54%, is still about 8 basis points above its pre-inflation report trading figures.

Retail Sales Data Prompts Fed Cut Bets: The probability of Fed rate cuts in May and June 2024 has increased.

In January, retail sales contracted by 0.8% from a month earlier, marking a sharp reversal from December's 0.4% surge. It is the biggest drop in retail sales since the bank crisis of March last year. On an annual basis, retail sales rose 0.6%, reflecting a sharp decline from December's 5.3% annual rate.

This has led traders to anticipate earlier rate reductions, with a June rate cut now seen as almost certain, boasting an 86% probability, while a downward adjustment in the fed funds rate by July is nearly fully anticipated by market participants.

Money markets are currently forecasting a total of 105 basis points in rate cuts by the end of 2024, according to CME Group's Fed Watch.

The bond market responded positively to these developments, with rallies on Wednesday and continued strength into early Thursday trading as yields softened.

Notably, the iShares 20+ Year Treasury Bond ETF (TLT  ) and the iShares 7-10 Year Treasury Bond ETF (IEF  ) both experienced gains, opening 0.9% and 0.5% higher on Thursday.