(Bloomberg) — US Treasuries were chastened Monday by an increase in consumer inflation expectations as traders looked ahead to April data on price pressures that could alter the outlook for Federal Reserve monetary policy.
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Yields across the maturity spectrum pared their declines after a New York Fed survey showed US consumer expectations for inflation over the next year rose to the highest since November. They remained slightly lower on the day, and down more than 10 basis points from year-to-date highs reached in late April. Inflation concerns have ebbed since then, reviving expectations for at least one Fed rate cut this year.
The bond market remains caught between demand from asset managers inclined to buy at elevated yield levels and the risk that inflation will remain sticky. Consumer price gauges for January to March topped consensus forecasts, fueling sharp bond-market selloffs. April data will be released Wednesday, following wholesale price gauges on Tuesday.
“We are happy to lean into the weakness in the bond market,” James Athey, a portfolio manager at Marlborough Investment Management Ltd., said on Bloomberg Television Monday. “I still think we are in a world where duration is attractive.”
Central bank officials have been delivering the message that patience on rate cuts is warranted. Fed Governor Michelle Bowman said Friday she didn’t expect it would be appropriate to cut interest rates in 2024, pointing to persistent inflation in the first several months of the year.
Even benign consumer prices data this week may not alter the Fed’s stance, Daragh Maher, head of research Americas at HSBC, said on Bloomberg Television.
“The market changes on a dime — we’ve seen that many times this year already — but for the Fed guidance, I think they’ll stick with the idea that we’ve got to be patient,” he said.
Since the March inflation readings, evidence that the labor market is softening has stoked hope that inflation will follow. Expectations for a quarter-point rate cut in September have rebounded to just over 70%, and a November cut is once again fully priced in. A total of about 41 basis points of easing is priced in for the entire year, though, down from more than 150 basis points at the start of the year.
Treasuries gained about 1.1% this month through May 10 as measured by the Bloomberg US Treasury Index, clawing back some of their 2.3% loss in April — the worst in more than a year.
The 10-year note’s yield has scope to decline to around 4.30% if the market resumes pricing in at least two Fed rate cuts this year, Peter Tchir, head of macro strategy at Academy Securities Inc., said on Bloomberg Television.
–With assistance from Carter Johnson.
(Adds New York Fed inflation expectations survey, updates yields throughout.)
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