Treasuries Slip as Bond Traders’ Most-Hyped Week in Years Ends
(Bloomberg) -- Treasuries are ending the week at mostly higher yield levels after the first Federal Reserve interest-rate cut in four years.
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While Wednesday’s half-point rate cut was larger than the quarter-point cut many market participants expected, note and bond yields reached their lowest levels of the year in the days leading up to it. That left the market with little scope for gains, particularly as the outlook for future rate cuts remains murky.
Friday’s yield increases faded after Fed Governor Christopher Waller, speaking on CNBC, said the Fed should consider another half-point rate cut if the job market worsens. Two-year yields were little changed on the week at around 3.57%, consistent with expectations for additional Fed easing keeping a lid on short maturities.
Longer-dated yields have risen at least 5 basis points this week, the 10-year to around 3.72%. The gap between two- and 10-year yields reached the widest level since June 2022. That measure of the yield curve is steeper for a fifth straight week, the longest streak since October 2021.
Interest-rate strategists at Bank of America Corp. in a report Friday said the Fed’s dovish stance warranted buying bonds when yields rise. They look for the 10-year to end 2024 at 3.5%, reflecting another half-point rate cut in November and a quarter-point move in December.
Economists at Citigroup Inc. and JPMorgan Chase & Co. have the same forecast, but several others predict quarter-point moves going forward.
Fed Governor Michelle Bowman, who dissented from Wednesday’s decision in favor of a quarter-point rate cut, said Friday that the half-point move “could be interpreted as a premature declaration of victory” on inflation, which remains higher than the central bank’s 2% target. Consumer spending remains strong, supported by “a healthy labor market,” Bowman said in a statement explaining her dissent.
Swap contracts that aim to predict future moves fully price a quarter-point cut in each of the two remaining Fed meetings of the year, and a meaningful chance of one half-point reduction.
Treasury yields declined only briefly after Wednesday’s rate decision, and resumed rising after Fed Chair Jerome Powell in the post-meeting news conference cautioned against expecting a pattern of half-point moves and said the neutral level of interest rates is likely higher than it was before the pandemic.
The market-implied terminal rate — the level at which borrowing costs are expected to settle — remains around 3%, little changed on the week.
US bond market volatility fell to the lowest level in two months this week. The decline — a function of activity in interest-rate options — reflects expectations for a measured policy approach for the rest of this year and into next year.
Investors’ attention now turns to upcoming economic data and remarks from policymakers. Next week’s economic calendar includes the Fed’s preferred inflation gauge for August, and more than a dozen appearances by Fed policymakers.
Also, Treasury auctions next week include the largest ones in the lineup — $69 billion of two-year notes Tuesday and $70 billion of five-year notes Wednesday — as well as $44 billion of seven-year notes Thursday.
(Adds Bank of America and other forecasts in fifth and sixth paragraphs, Bowman statement in seventh paragraph.)
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