(Bloomberg) -- US Treasuries fell, trimming their weekly advance, as investors prepared for inflation data due later on the day that is expected to show an acceleration in consumer price growth.
The yield on 10-year US notes rose three basis points to 4.27% on Friday, and traders pared bets on interest-rate cuts from the Federal Reserve this year to 62 basis points from as high as 65 basis points on Thursday.
Traders are squaring their positions after five sessions of gains, with the benchmark US yield lower by 10 basis points this week. The recent rally was driven by economic data that reinforced wagers on at least two rate cuts this year, as well as speculation President Donald Trump will name a more dovish successor to Jerome Powell as soon as September or October.
Now, attention has turned to the Fed's preferred inflation gauge, the core PCE price index, which is expected to edge higher. Traders are also wary of increased bond supply due to the US's lingering fiscal risks, which may inhibit a substantial move lower in longer-term yields.
"We do not see a further rally in Treasuries from these levels," said Mohit Kumar, chief European strategist at Jefferies, who predicts US bonds will underperform German peers. "We believe that fiscal deficits would be the dominating concern for markets in the second half of the year."
Read: Jim Millstein Says US Risks 'Fiscal Disaster' If Recession Hits
Fed officials including Christopher Waller and Michelle Bowman, two Trump nominees, signaled in recent days they'd be open to lowering rates as soon as the next meeting. That's as candidates jostle to replace Powell, with investors and analysts reckoning his successor will most likely share Trump's dovish bias.
Data on Thursday showed the growth rate for personal spending during the first quarter — part of a revision to US first-quarter gross domestic product — was unexpectedly revised to 0.5% from 1.2%.
Other tailwinds to Treasuries include proposed US changes to a key capital buffer, which Powell said should bolster banks' roles as intermediaries in the market. Meanwhile, the removal of the Section 899 "revenge tax" proposal that had been worrying Wall Street had little market impact, though it could improve sentiment toward US assets at the margin.
Traders are also monitoring Trump's proposed 'big beautiful bill', which is nearing a vote in the Senate. It has fueled concerns surrounding the US fiscal deficit, weighing on longer-maturity Treasuries.
Wells Fargo strategists see the potential for the spread between US 10-year and 30-year yields to widen to 75 basis points by end-2025, in what they describe as a "fiscal blowout" scenario. The difference in yields is currently around 55 basis points.
"We expect very long duration bonds to continue lagging their five- and ten-year counterparts," a team led by Michael Schumacher wrote in a note. "The significant relative rise in 30-year yields is due to investor concerns about potential supply."
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