(Bloomberg) — Treasuries pared this week’s sharp losses Thursday after inflation gauges in the US first-quarter economic growth data were unexpectedly revised lower.
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The revisions rekindled expectations for at least one Federal Reserve interest-rate cut this year, which were dented on Tuesday by strong consumer confidence data and a Fed official’s comment on the potential for additional rate increases. Writing for Bloomberg Opinion Thursday, former New York Fed chief Bill Dudley said monetary policy appeared to “exerting negligible restraint on growth and inflation.”
Yields across the Treasury curve declined as much as five basis points to session lows after the growth rate for core consumer prices during the first quarter was revised to 3.6% from 3.7%. A large block trade in 10-year note futures provided additional support. They remain higher on the week as the shifting Fed outlook hurt demand for three Treasury note auctions.
“I’m not sure the Fed is doing anything wrong taking it slowly” with regard to monetary policy changes, said Kathy Jones, Charles Schwab’s chief fixed-income strategist, on Bloomberg Television. “We are seeing inflation come down. We don’t mind buying Treasuries at these levels.”
The two-year note’s yield, more sensitive than longer maturities to changes in Fed policy, dropped as low as 4.93%. It nearly reached 5% on Wednesday for the first time since May 1. Auctions of two-, five- and seven-year notes over the past two days drew higher-than-anticipated yields, a sign demand fell short of expectations.
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“We could see a bit of consolidation and lower yields as the supply glut is behind us,” said Axel Botte, fixed income strategist at Ostrum Asset Management in Paris.
Still ahead this week are speeches by Fed officials including New York Fed President John Williams — on Thursday at 12:05 p.m. in New York — and Atlanta Fed President Raphael Bostic on Friday.
Friday also brings additional inflation data — price indexes for April personal income and spending, including the gauge the Fed aims to bring down to a long-run average of 2%. It was 2.7% in March and has exceeded 2% since March 2021.
A separate gauge of April inflation released on May 15, the consumer price index, rose slightly less than economists expected, and along with weaker-than-anticipated retail sales data spurred gains for bonds.
Treasury yields remain below year-to-date highs reached in late April as economic data broadly have kept alive the prospect of a Fed rate cut this year, even as Wall Street banks have backed away from forecasts for more and moved their predictions later in the year.
Friday’s month-end rebalancing of bond indexes to incorporate securities created during the month — at 4 p.m. New York time for Bloomberg Indices’ dollar-denominated benchmarks — has the potential to spur buying by passive investors in particular.
Auctions during the month of 10-, 20- and 30-year new issues will contribute to an estimated 0.10-year increase in the duration of the Treasury index. While larger than the monthly average, it’s a smaller increase than has been typical for the month over the past decade, as the Treasury has disproportionately increased auction sizes for its shorter-maturity notes such as the two- and five-year.
–With assistance from Liz Capo McCormick.
(Adds calendar items ahead in last five paragraphs and updates yield levels.)
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