US Treasury bonds advanced after consumer price data came in softer than anticipated, prompting traders to scale back their bets on imminent interest rate hikes from the Federal Reserve.

The yield on the two-year Treasury note, which is particularly sensitive to shifts in the near-term monetary policy outlook, tumbled as much as 14 basis points to 4.14%, on track for its largest single-day drop since February. Pricing in the interest rate swaps market now indicates the probability of a Fed rate increase later this month has fallen to around 20%, down from 40%.

This data release brought relief to both bondholders and US policymakers. Federal Reserve officials had been weighing the need for prompt action to steer inflation back towards the central bank's 2% target. Earlier in the week, a resurgence of hostilities between the US and Iran had pushed oil prices higher, leading traders to increase their wagers on a July rate hike.

"This was a broad-based downside surprise," said Dan Carter, a senior portfolio manager at Fort Washington Investment Advisors. "A near-term hike is now off the table. The market had been worried about a hot inflation print, so this should be good for bonds and help re-steepen the yield curve. Our base case is that the Fed will hold rates steady, and this data supports that view."