(Bloomberg) -- Treasuries edged higher, extending Friday's gains, as investors shifted their focus to key readings on inflation due later this week.
Yields were 1 to 2 basis points lower across tenors Monday morning in New York as traders stuck to bets on interest-rate cuts after weaker US jobs data last week.
The attention will now turn to reports on producer prices and consumer prices, due Wednesday and Thursday, for signals of how quickly the Federal Reserve will lower borrowing costs as quickly as markets are now pricing.
"The balance of risks favors the bears for the time being, especially if we were to get a CPI figure at or north of 3% on Thursday, which would bring tariff-induced inflationary pressures back onto everyone's radar," said Michael Brown, senior research strategist at Pepperstone. "The jobs data on Friday was very disappointing, but there are still upside inflation risks in play."
A quarter-point cut this month is now fully priced by markets. Traders are also betting that the Fed may deliver a total of 75 basis points of easing between now and the end of the year — including a small chance of a 50-basis-point cut at its September 17 meeting.
The weaker US jobs data on Friday drove the two-year yield as much as 8 basis points lower on the view the Fed would will ramp up the pace of cuts.
The market is also facing a barrage of supply this week, with the Treasury offering three-year notes, along with 10-year and 30-year bonds. The 30-year sale in particular would test the market, Pepperstone's Brown said, as it comes after a deep selloff in longer-dated bond maturities in Japan, France and the UK last week on fiscal concerns.
Underscoring these worries, the 30-year Japanese government bond yield rose 3 basis points to 3.26%, closing in on its its highest level seen since the 1990s, as the resignation of Japan's prime minister unnerved investors who see an increasingly uncertain future for the country's ruling party as raising political risks in the longer term.
In the US, two-year yields — which most closely track expectations for changes to monetary policy — slipped two basis points to 3.49%, while the benchmark 10-year yield traded at 4.07%.
"The markets have appropriately priced where the Fed is going," BlackRock Inc. portfolio manager Russell Brownback said on Bloomberg Radio. "The curve has steepened in deference to a soft landing and better nominal GDP growth ahead."
Economists are expecting core CPI to come in 3.1% higher than a year ago, signaling that inflation remains high and complicating the argument for aggressive rate cuts. This week's data releases also include a revised reading of the Bureau of Labor Statistics jobs survey on Tuesday.
"US CPI may put this 50-basis-point cut theory a bit to the test," said Evelyne Gomez-Liechti, multi-asset strategist at Mizuho International Plc.
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