(Bloomberg) -- US Treasuries snapped two days of gains as traders pared bets on a September interest-rate cut ahead of the Federal Reserve's gathering at Jackson Hole.
The yield on the 10-year benchmark rose by three basis points to 4.32%. The two-year yield — which is more sensitive to changes in monetary policy — was two basis point higher at 3.77% Thursday morning in New York.
While Jackson Hole — and particularly the speech from Fed Chair Jerome Powell on Friday — is the week's main event, traders were watching a slew of data on Thursday. Weekly jobless claims showed a bigger-than-expected increase in new filings while a separate report suggested manufacturing is expanding at the fastest rate in more than three years.
At Jackson Hole, "Powell may still guide toward cuts while sounding hawkish," said Colin Graham, head of multi asset strategies at Robeco, in an interview. "We think the market is mispricing the probability of a cut."
Interest-rate swaps show about a 70% chance of a quarter-point reduction at the Fed's meeting in mid-September. A week ago the odds were above 90%.
Investors will be monitoring Powell's speech for evidence that could reinforce — or undo —those wagers. Some have even pushed into wagers that benefit from an outsize, 50-basis-point cut.
"The state of the US labor market is closely watched by the Federal Reserve, and by global markets," said James Bilson, a fixed income strategist at Schroders. The firm thinks the chance of a so-called hard landing has increased to about 20%.
"We don't see justification for a larger 50 basis points cut in September, but there is now scope for the Fed to reduce rates more quickly than they might have otherwise," he added.
Final appearance
It will be the final time that Powell attends the Jackson Hole gathering in the capacity of Fed chair given his term expires next year. Powell has repeatedly stressed the need for caution in lower rates, an approach that's incurred the wrath of President Donald Trump.
Daniel Loughney, head of fixed income at Mediolanum International Funds Ltd, expects Powell to stick to that message at this week's symposium, potentially triggering some volatility if his speech sounds more hawkish than what markets would like.
"The dynamic at the moment is that Powell looks to be in defensive mode because of the Trump attacks," he said.
Still, Loughney expects the market's attention to shift quickly to Powell's likely successor — and the scope for more rate cuts — once the Jackson Hole gathering is over. He's positioned for short-dated Treasuries to outperform European peers.
--With assistance from Alice Atkins.
(Recasts with updated prices.)
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