Treasury yields dropped to weekly lows Friday after weak January retail sales data prompted traders to restore bets that the Federal Reserve will cut interest rates by September.
The bond market rally erased any remaining losses from Wednesday, when hotter-than-expected consumer price data pushed the market’s pricing of a rate cut out to December. The price action extended the whipsawing pattern unfolding as Fed policymakers pursue non-inflationary growth. The post-CPI selloff was mostly reversed Thursday by benign producer price inflation readings.
“These are not easy markets to trade,” said Evelyne Gomez-Liechti, strategist at Mizuho International. She still prefers to sell meaningful rallies in US dollar rates.
Yields declined by at least four basis points across maturities, the 10-year by seven basis points to 4.46%, on pace for a fifth consecutive weekly decline, the longest falling streak since 2021. It peaked near 4.81% in mid-January, the highest level in more than a year.
Interest-rate swap contracts that predict Fed policy priced in about 37 basis points of easing by year-end versus 30 basis points on Thursday, with the first quarter-point fully priced in by September. Wall Street views on Fed policy remain deeply divided, with several major banks including Bank of America and Deutsche Bank predicting no action this year and several others, including Goldman Sachs and JPMorgan Chase, forecasting at least two quarter-point cuts.
US January retail sales fell the most in two years, widely missing economist estimates. However the month was marked by devastating wildfires in Los Angeles and severe winter weather in several states.
At the same time, bond investors are wrestling with the potential consequences of import tariffs that US President Donald Trump has repeatedly threatened but not imposed on goods from major US trading partners.
A Bank of America survey published Friday showed investors have turned less bearish on US bonds, with fewer expecting the 10-year yield to peak above 5% this year, while more see it dipping below 4%. But participants also indicated a sharp decrease in conviction, a reflection of the muddied macro outlook.
“Bonds have been all over the place,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “Investors are not convinced about what to do.”
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