(Bloomberg) -- US Treasuries gained for a second day as traders shrugged off the risks of inflation policymakers raised at last month's Federal Reserve meeting and turned their focus to Jerome Powell's speech later this week.
Two-year yields — which are most sensitive to changes in monetary policy — edged lower to 3.74% while the benchmark 10-year's fell two basis point to close at 4.29%.
In minutes from the Fed's July meeting, which were released Wednesday afternoon, officials highlighted the risks of inflation outweighing concerns over the labor market. But investors largely brushed off those concerns as the meeting was held prior to a surprise jobs report that showed hiring had cooled more than expected.
"The Fed's July minutes were predictably hawkish – excluding the two dissenting voters – but may not say much about the thinking in the Committee now, given clear signs of a weakening labor market in recent data," Elisabet Kopelman, US economist for Skandinaviska Enskilda Banken AB, wrote in a note. "Markets reacted by marginally reducing their expectations for rate cuts but reactions were very muted."
Interest-rate swaps showed traders priced in about a 77% probability that the Fed will lower rates next month, with a total of four quarter-point reductions by next June.
Earlier in the session, bonds climbed earlier in the day as a stock selloff damped risk sentiment and a solid auction of 20-year bonds underscored the demand for long-term debt.
The minutes come two days before Powell delivers a closely watched speech in Jackson Hole, Wyoming — a stage he has previously used to steer investor expectations on interest rates.
What Bloomberg Strategists say...
"You could argue that the Fed minutes are out of date given the weak payroll + revisions, though for now the unemployment rate (specifically cited by Powell as a better read on labor conditions than headline payroll growth) is still within recent ranges. It looks like the bond/STIR market has opted to interpret much of this as old news or irrelevant. While it is true that some other FOMC participants have shifted their tone, these headlines at least suggest that a rate cut next month may not be a done deal."
—Cameron Crise, Macro Strategist, Markets Live
Powell is facing increasing pressure from President Donald Trump to lower interest-rates.
Adding to pressures on the central bank, Trump called on Fed Governor Lisa Cook to resign after a staunch ally called for an investigation of the board member's mortgages. A resignation would create another opening for Trump to fill on the Fed board, potentially tipping the balance of Republican appointees to four of its seven members.
The dollar moved lower against a basket of peers as the move signaled greater pressure on the central bank from Trump following his repeated criticisms of Powell. It closed little changed.
Auction Demand
The $16 billion auction of 20-year new issue drew a yield of 4.876% — slightly below the level immediately before the 1 p.m. New York time bidding deadline. Direct bidders — typically large investors that circumvent dealers — bought 26.5% of the sales, a record high for the tenor since its 2020 reintroduction.
"I wouldn't overreact to late summer auctions, especially in the 20-year space, which has been an adventurous maturity for the US Treasury," said George Catrambone, head of fixed income, DWS Americas. "That said, it's some reflection that with 100 basis-point of rate cuts priced in over the next year and a significant increase in term premium, there is still interest out the curve."
(Recasts story with updated prices.)
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