Treasury Yields Rise After Resilient Data Suggests Measured Fed
US Treasury yields edged higher after resilient economic reports prompted traders to slightly trim their expectations for the scope of Federal Reserve easing this year.
Yields were some 2 basis points higher across major benchmarks after weekly jobless claims arrived in line with expectations and pointed to a steady employment sector. A second read on US GDP for the second quarter showed upside revisions to the headline and personal consumption components. The GDP price index was also revised higher by 0.2% while the core PCE reading dropped slightly.
The market trimmed its pricing of interest rate cuts by a couple of basis points after the release. Traders see 31 basis points of easing at next month’s Fed meeting, or about 25% odds of a half-point cut. For the year, traders expect just under 100 basis points of cuts, keeping alive the prospect of one jumbo easing over the scheduled three Fed meetings in 2024.
“We do see lower rates from here but it is not going to be a straight line,” Earl Davis, head of fixed income at BMO Global Asset Management, told Bloomberg Television.
“It would not surprise us if we get 4% 10-year yields — that is a level where you start backing up the truck,” he said. BMO plans to add to their existing long positions if that eventuates.
For more than a year, the central bank has kept rates at a two-decade peak above 5%, and for some time bond traders have been willing to price in aggressive rate cuts on the basis Fed policy has become too restrictive as the pace of inflation has steadily declined. Fed Chair Jerome Powell set the stage at Jackson Hole last week when he said “the time has come for policy to adjust.”
Traders are running ahead of a central bank that has opened the door to cutting rates in September, with around 210 basis points of easing priced across the nine scheduled Fed meetings over the next 12 months.
It leaves a Treasury market that has enjoyed a substantial rally over the past four months on hold, waiting to see whether August employment data due at the end of next week seals the current pricing of a quarter-point cut or paves the way for a larger easing at the Fed’s Sept. 17 to 18 meeting.
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