Bond traders priced in less monetary policy easing by the Federal Reserve this year — and briefly set the odds of a first move in June to less than 50% — after a gauge of US manufacturing activity showed expansion for the first time since 2022.
The amount of Fed easing priced into swap contracts for this year dropped to fewer than 65 basis points — less than Fed policy makers themselves have forecast — after ISM manufacturing for March exceeded all estimates in Bloomberg’s survey of economists. A bond-market selloff ensued in which two- to 30-year Treasury yields rose at least 10 basis points on the day, among their biggest daily increases this year.
The selloff was already under way before the ISM data release as traders reassessed the outlook for monetary policy based on economic figures and comments by Fed Chair Jerome Powell on Friday, when US markets were closed.
The ISM report “feeds into the narrative coming out of last week,” whereby the economy’s resilience enables the Fed “to be patient,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. For the bond market, that means rates stay “higher for longer.”
Friday’s developments included personal income and spending data for February showing that consumption remains strong while progress toward lower inflation has stalled. Subsequently, Powell reiterated that the Fed wants to be more confident in the inflation trend before cutting rates, and that strong labor-market conditions mean there’s no urgency.
