(Bloomberg) -- Treasuries edged lower, suggesting a recent rally is running out of steam as investors weigh whether the economy is weakening enough to justify deeper Federal Reserve rate cuts.
Benchmark 10-year yields closed one basis point higher at 4.06%, while the policy-sensitive two-year yield climbed three basis points to 3.43%.
On Tuesday, a reading of private payrolls did little to change the view that the US labor market remains stable. Traders are fully pricing in two quarter-point rate reductions by the end of the year.
Adding to the caution, Fed Governor Michael Barr said rates should remain steady until officials see more evidence that inflation is heading toward the central bank's 2% target. Consumer prices in January rose 2.4% on an annual basis, according to data released last week.
"The Fed is going to look at the set of data and say that they don't have enough conviction to really do anything," said Kelsey Berro, a fixed-income portfolio manager at
The moves come after Treasuries rallied 0.9% last week, the best performance since April, as S&P 500 tumbled. Data showed an unexpected decline in the unemployment rate and a consumer price index reading that came in below forecasts.
That pushed the 10-year yield — a benchmark for consumer borrowing rates — toward 4%, a level it hasn't hit since late last year.
In a range-bound environment, investors hold bonds to collect steady income and "position as a hedge against a risk-off drawdown because it is working in those days," said Berro. "And as long as inflation expectations are remaining well anchored and the reason for the risk-off isn't a function of higher inflation, then the Treasury market does serve as a diversifier."
What Bloomberg Strategists say...
"Treasuries are pressing toward a pivotal test, with the rally increasingly contingent on a clear deterioration in the data rather than incremental softness. While equity-market volatility and defensive flows continue to underpin duration demand, a long bias looks increasingly consensus, leaving Treasuries at risk."
—Brendan Fagan, FX Strategist, Markets Live. For the full analysis, click here.
Last week's softer US inflation data and quant funds deleveraging in equities are driving the bid for bonds, said Prashant Newnaha, senior strategist at TD Securities in Singapore.
"Technically 4% on US 10-year is setting up as a make or break level. Expect a sharp rally if this level is broken," he said.
Traders are on the lookout this week for minutes from the Fed's January meeting to glean more insight into the timing for the next interest-rate cut. Fed officials kept interest rates on hold at their meeting last month following three cuts in the closing months of 2025.
"We think the labor market is still generally on a softer trend but the recent data has been quite encouraging," Kamakshya Trivedi, chief FX strategist at
While Trivedi expects the US inflation picture to remain benign, others remain concerned about price pressures. Benoit Anne, managing director at MFS Investment Management, said the US economy looks robust, yet this raises the risk of overheating.
Should the upcoming data releases indicate this is happening, the current rate pricing could well unwind, Anne said, triggering a potential "significant correction" in markets.
(Updates prices and adds Fed governor comments starting in second paragraph.)
More stories like this are available on bloomberg.com
