(Bloomberg) — Treasuries rose to take benchmark yields to the lowest in nearly a week ahead of US manufacturing data that will provide the latest clue on how much the Federal Reserve may cut interest rates this year.
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Longer-dated bonds led the market higher following benign inflation data on Friday that suggested that the Fed will cut at least once this year. Next up is manufacturing PMI and then the ISM’s manufacturing reading on Monday, both expected to show resilience in the world’s largest economy.
Markets have become highly sensitive to each data point as the Fed has indicated that the pace of rate cuts will depend on economic figures. The 10-year Treasury yield dropped roughly 20 basis points last month, on signs of a cooling jobs market and easing inflation pressures.
“Pricing for Fed rate cuts is continuing to take a modestly more constructive policy outlook,” said Richard McGuire, head of rates strategy at Rabobank, adding that this was helping Treasuries to extend gains from late last week.
Yields on 10-year Treasuries fell for a third day, down as much as four basis points to 4.46%, the lowest since May 28. The two-yield was little changed at 4.87%. European bonds also posted gains across the board, as the region’s manufacturing PMI data mostly came in slightly below expectations.
US data on May payrolls due on Friday will be the highlight of this week’s calendar, ahead of the Fed’s policy meeting on June 12. Overnight index swaps contracts tied to upcoming meetings continue to fully price in a quarter-point rate cut in December, with the odds of a move as soon as September edging up to around 50%. Through year-end, the contracts imply a total of 36 basis points of rate reductions, up slightly from a week ago.
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