Treasury two-year yields fell to their lowest level since May as a surprise drop in producer prices reinforced bets on the Federal Reserve cutting interest rates this year.

Traders are pricing in an 80% chance of a Fed rate cut in March, up from slightly more than 50% a week ago. Friday's economic data came a day after a hotter-than-expected reading on consumer prices, highlighting the difficult road ahead for officials in getting inflation to the 2% target. Investors also sifted through bank earnings as the US earnings season began, while keeping an eye on geopolitical developments ahead of Martin Luther King Jr. Day on Monday.

US two-year yields dropped 10 basis points to 4.15%. While traders expect the first rate cut in May, they have priced in about 20 basis points of easing in March. Historically, rate changes have been made in increments of 25 basis points. The S&P 500 fluctuated while posting a weekly gain. Bitcoin fell. Oil prices rose as the United States and its allies launched airstrikes in Yemen against Houthi rebels.

Among the primary reasons for the recent drop in inflation were lower energy costs and supply chains that had largely ironed out their pandemic strains. The turmoil in the Red Sea is impeding both of the disinflationary forces that central bankers hoped would help them finish the job.