(Bloomberg) — Treasuries rose ahead of a barrage of US data that may support bets the Federal Reserve will still cut interest rates this year, despite signs the downtrend in inflation has stalled.
Most Read from Bloomberg
The yield on 10-year Treasuries fell as much as four basis points to 4.59%, extending gains that followed Fed Chair Jerome Powell’s remarks on Wednesday. Powell soothed investors’ fears that he would lean forcefully against the prospect of easing or even flag a potential rate hike.
The advance comes after Treasury market posted its biggest loss in 14 months in April. For the gains to turn into a meaningful turnaround though, investors will require evidence the US economy is cooling. They will be looking to jobless claims and factory orders data due later, as well as the non-farm payrolls figure on Friday.
“Current economic conditions are consistent with a soft landing this year, even if this outcome isn’t without an occasional speed bump,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. He expects 10-year US Treasury yields to decline to 3.85% by year-end.
While Powell didn’t explicitly signal a rate cut was coming, he said price growth will likely resume cooling this year. He also said it’s unlikely that the next policy move will be a rate increase, a risk market participants have been growing increasingly jittery about.
Money-market traders kept bets on one quarter-point cut by November, while also assigning a roughly one-in-three chance to a second move this year. At the start of the year, bets were on as much as six reductions in 2024.
The Fed also said it will start offloading fewer Treasuries in the market as part of its quantitative tightening program, letting just $25 billion in notes mature every month, compared to $60 billion previously. That provided another tailwind for the market, as bond dealers expected the pace to be trimmed to $30 billion.
“The lack of hawkish undertones combined with the slower balance sheet rundown seems sufficient to trigger short covering after the major build in US Treasuries shorts in the run up to the meeting,” said Michael Leister, head of rates strategy at Commerzbank AG.
Powell said it will probably take longer for central bankers to gain enough confidence in the downward trajectory of inflation to consider easing policy. He also stressed future policy decisions will depend on the incoming data.
“The Fed tends to deliver dovish surprises on FOMC meeting days and usually pivots during intra-meeting periods on the back of data flow,” said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, who expects no cuts this year.
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.