(Bloomberg) -- US Treasuries rallied ahead of a closely watched inflation reading that could cement bets on the size of the Federal Reserve’s interest-rate cut this month.

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Data later Wednesday is expected to show US consumer prices increased 2.5% in August from a year earlier — down from 2.9% in July. As the market counted down to the release, the yield on two-year notes fell to 3.55%, the lowest since September 2022. The rate on the 30-year bond touched 3.92%, a level last seen over a year ago.

While the Fed is widely expected to start lowering interest rates at its meeting on Sept. 18, the question is whether it will deliver a half-point cut, especially if incoming data suggests the economy is losing momentum. Traders currently see a roughly 20% chance that it could, bolstering the investment case for bonds.

“Clearly the market wants to be long,” said Evelyne Gomez-Liechti, a strategist at Mizuho International. “However, I think we have rallied quite a lot, and unless we get a downside surprise in today’s CPI, I would expect a bit of consolidation around current levels ahead of the Fed meeting.”

Treasuries have staged an impressive rally this year amid mounting evidence that a softer labor market and cooling inflation will pave the way for easier policy. Those expectations were also bolstered by Jerome Powell’s message at Jackson Hole in August, where he said the “time has come” for rate cuts.

Global Rally

The yield on two-year Treasury notes has dropped almost one-and-a-half percentage points from a high in April. The move mirrors gains across bond markets this year, as sentiment over the world’s growth outlook sours.

The latest evidence came this week as oil slumped and deflation fears intensified in China, pulling the average yield on a Bloomberg gauge of investment-grade government and corporate debt to 3.3%, the least since September 2022.

Still, investors appear undeterred by the low yields on offer. A sale of three-year Treasury notes Tuesday drew record demand from a category of investors that includes overseas accounts. The Treasury will sell $39 billion of 10-year securities later Wednesday and $22 billion 30-year bonds on Thursday.

That’s partly because concern over rising consumer prices have taken a backseat to growth worries. The US 10-year breakeven rate — a market-based gauge of future price rises — has declined to 2% and suggests inflation is in danger of falling below the Fed’s target.