US Treasury yields slid on Wednesday after a softer-than-expected inflation reading bolstered hopes that the Federal Reserve may soon ease its aggressive tightening cycle. The yield on the benchmark 10-year note fell 8 basis points to 3.42%, while the 2-year yield, which is more sensitive to monetary policy, dropped 12 basis points to 4.12%.

The trigger was the latest Consumer Price Index (CPI) report, which showed headline inflation rising 6.5% year-on-year in December, down from 7.1% in November and marking the sixth consecutive monthly decline. Core inflation, excluding food and energy, rose 5.7%, also below expectations. Month-on-month, headline prices actually fell 0.1%.

Investors took the data as a sign that the Fed’s rate hikes are working. The central bank has lifted its benchmark rate from near zero to between 4.25% and 4.5% since March, the fastest pace of tightening in decades. The market now sees a 75% chance of a quarter-point hike at the Fed’s next meeting in February, down from a near certainty of a half-point move just weeks ago.

“The inflation beast is finally being tamed,” said Sarah Chen, a fixed-income strategist at Barclays in London. “This gives the Fed room to downshift. The question is whether they stop after one or two more hikes.”

But not everyone is convinced. Some analysts warn that the fall in yields could be premature. Labour markets remain tight, with unemployment at 3.5% and average hourly earnings still rising at an annual rate of 4.6%. “The Fed needs to see sustained evidence that inflation is heading back to 2%,” said Mark Thompson, chief economist at Investec. “One month of data doesn’t make a trend.”

The yield curve, meanwhile, steepened slightly as long-term yields fell less than short-term yields. The spread between 2-year and 10-year notes remained deeply inverted at minus 70 basis points, a classic recession signal. “The inversion reflects fears that the Fed will keep tightening until something breaks,” said Chen.

Treasury markets have been volatile in recent months, with the 10-year yield swinging from a peak of 4.24% in October to a low of 3.27% in December. The current drop suggests that bond traders are betting the Fed will soon declare victory over inflation. But history suggests that the last mile of disinflation is often the hardest.

“The easy gains have been made,” said Thompson. “Getting inflation from 6% to 2% could take years, and the Fed will need to keep rates high through 2024 at least. Markets are getting ahead of themselves.”

For now, though, the mood is buoyant. Stocks rallied on the inflation news, with the S&P 500 rising 1.3%. The dollar weakened, boosting commodities. Oil prices edged higher, and gold jumped above $1,900 an ounce.

The Fed’s next policy decision is on February 1. Chair Jerome Powell has stressed that the central bank will not pivot until it sees “compelling evidence” that inflation is under control. Wednesday’s data may be a step in that direction, but it is far from conclusive.