(Bloomberg) -- Treasuries fell as strong economic data prompted traders to scale back rate-cut expectations ahead of testimony from Federal Reserve Chair nominee Kevin Warsh.
Yields rose across maturities, led by the policy-sensitive two-year note, which climbed four basis points to 3.76%. The move followed upbeat signals on consumer spending and the labor market, with both the ADP weekly jobs report and March retail sales beating forecasts.
Attention now turns to Warsh's Senate Banking Committee appearance, where he's expected to face questions on rates, inflation and Fed independence. The hearing, which begins at 10 a.m. in Washington, is the first step in the process of confirming President Donald Trump's choice to take over the central bank.
Tuesday's data underscore the scenario Warsh would inherit if confirmed. The reports suggest the economy remained resilient in the first month of the US-Iran war, while earlier data showed inflation still well above the Fed's target. That points to policymakers staying on hold this year, with traders now pricing in roughly a one-in-three chance of a cut.
"The market can expect a positive message on the economy from Warsh," said Clayton Triick, head of portfolio management at Angel Oak Capital. "Warsh can signal a cut in the second half of the year, if the conflict is over and oil is back at $75 a barrel."
The $31 trillion bond market has rallied for much of this month, reversing some of the heavy losses inflicted on Treasuries by the oil price surge during March when the conflict in Iran escalated.
Before the US-Israeli attack on Iran in late February, Treasuries had been rallying in part on the prospect that Warsh — who voiced support for lower interest rates before gaining Trump's nomination at the end of January — would push for easing rates later this year.
Warsh is expected to make a case for looking beyond near term inflationary pressures from the oil price surge.
"Monetary policy independence is earned — and better policy decisions crafted — by steering clear of distractions," Warsh said in prepared testimony released Monday. "I am committed to ensuring that the conduct of monetary policy remains strictly independent."
Yields on US Treasuries have settled into a range in recent weeks after shooting higher in the first weeks of the Iran war amid the spike in oil prices. A ceasefire and rising hopes for a peace deal have tempered those early losses, sending US 10-year yields drifting around 4.25%.
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