The minutes of the US Federal Reserve's May meeting released on Wednesday showed that many policymakers questioned whether the policy was strict enough to reduce inflation to the target level. Affected by this, US debt fell, with short-term US debt leading the decline. According to the data, two-year US Treasury yields rose by about 5 basis points to 4.88%; 10-year US Treasury yields rose 1 basis point to 4.43%.

The minutes of the meeting showed that although the participants assessed the policy “well positioned,” many policymakers mentioned that they are willing to further tighten monetary policy if necessary. However, the discussions mentioned in the minutes took place before the US April CPI data was released. However, this inflation data shows that price pressure has cooled down for the first time in 6 months, which helps explain why the market reaction is relatively mild.

Ian Lyngen, head of US interest rate strategy at BMO Capital Markets, said: “Despite the 'firm and tough tone' in the minutes, the current inflation trajectory is not considered as scary as it was prevalent at the time.”

The inflation data released last week prompted a drastic repricing of the market. Investors bought US debt in large numbers in anticipation of the upcoming interest rate cut by the Federal Reserve. Since then, however, traders have lowered their expectations that the Federal Reserve will cut interest rates this year. Currently, the swap market expects the Federal Reserve to cut interest rates by 38 basis points this year, down from 42 basis points last weekend.

After the minutes of the meeting were published, Nomura Securities economists revised their predictions on the Federal Reserve's monetary easing policy. They said, “The threshold for cutting interest rates seems to have been raised.” They now expect the Federal Reserve to cut interest rates for the first time in September instead of July as previously anticipated.

Earlier on Wednesday, after the $16 billion 20-year US bond auction, the yield curve continued to flatten. The yield was basically close to pre-auction levels, indicating strong demand. Large transactions shortly after the auction also coincided with the flattening of the betting yield curve.

However, Columbia Threadneedle Investment interest rate strategist Ed Al-Hussainy said, “The yield curve may be further inverted. The market expects the Federal Reserve to stay on hold for a longer period of time, and the risk of a weak labor market is increasingly likely to knock down long-term bond yields.”