(Bloomberg) — On Friday, Treasury bonds saw an uptick, setting the stage for a modest weekly gain, thanks to data hinting at a slowdown in the U.S. economy.
According to Bloomberg’s most-read section, yields dipped by at least two basis points across the board, with short-term maturities decreasing by nearly four basis points. This trend hit a low during the session following a surprise decline in S&P Global’s services activity index and a downward adjustment in the University of Michigan’s consumer sentiment index for January. This rally nudged Treasury yields marginally lower for the week, a period that notably kicked off with the swearing-in of Donald Trump for his second non-consecutive presidential term.
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The recent data lends weight to the prediction that the Federal Reserve, slated to convene on January 28-29, could reduce interest rates at least once this year, possibly by June, following rate cuts in their last three sessions. Bonds also found support as Trump’s administration had yet to initiate new tariffs on imports, even though intentions were declared.
Christian Hoffmann, a portfolio manager at Thornburg Investment Management, noted, “With the Fed’s data-driven approach, economic news becomes pivotal for the market.” He added that “political events will continue to stir volatility and uncertainty.”
Bloomberg’s survey of money markets and economists predicts that Fed Chair Jerome Powell and his team will maintain the U.S. overnight interest rate in its current range of 4.25%-4.5% next week. Looking further ahead, rate swaps now indicate the market is leaning towards two quarter-point interest rate cuts by the end of the year, a change from the single cut anticipated just a week earlier.
Back in September, a sell-off in bonds sent 10-year yields soaring to a 14-month peak of 4.8% earlier this month amid fears that trade protection could drive inflation. However, inflation data for December, released January 15, was tame. The following day, Fed Governor Christopher Waller’s remarks about the possibility of a mid-year rate cut helped stabilize the market.
This week, short-term Treasury yields, which are more reactive than their long-term counterparts to Fed rate changes, have shown the most movement. The 10-year yield is currently 36 basis points higher than the two-year, slightly up from 34 basis points the previous week. Current open-interest data from Treasury futures indicates that investors are bracing for further steepening of the yield curve.
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