(Bloomberg) -- Treasuries were set to end the week on a strong note after being whipsawed by economic data, with traders coalescing around bets the Federal Reserve will cut interest rates by a quarter-point next month.
US government bonds advanced on Friday after a University of Michigan survey showed improving consumer sentiment and steady expectations for inflation. That pushed longer-dated yields even lower, with the 10-year's down on the week by about five basis points to 3.89%, after 3 p.m. in New York. The policy-sensitive two-year yield, meantime, was higher on the week by about one basis point.
The market action comes as traders narrow in on bets that the Fed will kick off its easing cycle with a 25-basis-point reduction in September, rather than a larger 50-basis-point move. Data this week — which showed ebbing inflation and a resilient consumer — caused traders to pull back on expectations for a super-sized rate reduction, and ramped up the focus on any commentary from policymakers who will descend on Wyoming for their annual central banking symposium that begins on Aug. 22.
"The odds for a 50-basis-point cut have been reduced from 100%," said Andrew Brenner, head of international fixed income at NatAlliance Securities LLC. "But the Fed will still cut in September. That will be evident at Jackson Hole."
As for the bond market move, he said, "Michigan inflation numbers and expectations are weighing on rates."
Pricing in the swaps market has stabilized, implying around 30 basis points of easing next month and about 93 basis points by the end of the year. That marks a big retreat after traders were indicating more than 150 basis points of Fed cuts for 2024 earlier this month.
The Fed is expected to follow other major central banks and begin an easing cycle at their Sept. 17 and 18 meeting, as the US policy band has been stuck at a two-decade peak for the past 13 months and some areas of the economy such as low-end consumers and housing metrics are weakening.
Still, when Jerome Powell speaks next week at the Jackson Hole annual symposium the Fed chair is likely to strike a balanced tone and not provide specific guidance about the pace of easing, given the August jobs report and inflation readings loom before the central bank's policy meeting next month.
John Brady, managing director at RJ O'Brien said, "Powell's comments next Friday will be important, but he too will be hamstrung a bit as we await the August employment report. That August employment number is going to be really important."
Chicago Fed President Austan Goolsbee, told National Public Radio Friday morning that the labor market and some leading indicators on the economy are still flashing warning signs.
It's been a tumultuous period for the bond market since early August, when data reflecting a weak US labor market fueled expectations for aggressive Fed rate reductions and sent Treasury yields slumping. Traders exacerbated the market days after the jobs report as angst surrounding the risk of a US recession led to a selloff in risky assets and a spike in demand for haven assets such as US government debt.
But by Friday, the MOVE Index — which measures US bond market volatility — had receded to levels last seen before the July US jobs report.
Positioning in bonds overall remains bullish, and analysts at Citi expect the Treasury market is "re-establishing a lower-volatility range trading environment," they said in a note Friday. The 10-year yield is "biased to retest the 4.01%-4.04% range support area as positioning squares after aggressive net long addition was seen in the belly this week," they added.
The market tone is one of "consolidation at these yield levels," said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.
"The housing data is still very weak and the only way, in our view, to loosen it up is through lower rates," he added.
(Updates yield moves in third paragraph.)
More stories like this are available on
bloomberg.com
