(Bloomberg) -- US Treasuries trimmed losses sparked by Federal Reserve Chair Jerome Powell's pushback against a third consecutive interest-rate cut.
The 10-year yield fell one basis point to 4.06% after surging 10 basis points on Wednesday. While the Fed delivered a quarter-point rate reduction as expected, Powell said another by year-end is not a given.
That comment served up a reality check for traders, who had been betting on an increased easing after the Fed stood pat for much of this year.
The Fed chief's "hawkish tone" at the press conference "left markets on the back foot," said Nicholas Mastroianni, a portfolio manager at Western Asset Management Company LLC. "Powell reiterated the tension between still-above-target inflation and a 'cooling' but not collapsing labor market."
Treasuries Slump as Powell Upends Market Bets on December Cut
Traders are now pricing 15 basis points of additional cuts by year-end, equivalent to a 60% chance of a quarter-point reduction. The odds were about 90% before the Fed meeting.
Even after Wednesday's moves, US yields remain near their lowest levels this year. In addition to cutting rates, the Fed also said it would stop unwinding Treasury holdings, currently at a pace of $5 billion a month, after signs of more significant tightening in money market conditions.
European government bonds weakened Thursday morning, catching up with the previous day's drop in their US peers. The German 10-year benchmark yield was two basis points higher at 2.65%, while the equivalent UK rate was four basis points higher at 4.43%.
Attention is shifting to the European Central Bank's interest rate decision due later Thursday, when it's expected to keep monetary policy unchanged.
Unlike the Fed, the ECB is widely viewed to have completed its cutting cycle, with traders pricing the probability of another reduction next year at less than 50%.
(Updates prices, adds additional context.)
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