(Bloomberg) — The highest Treasury yields in months — reached Friday after a string of strong economic data raised additional doubts about whether the Federal Reserve will cut rates again next month — proved attractive to bond investors.
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In particular, 10-year government bond yields reached 4.5% for the first time since May following the release of retail sales data, which included significant upward revisions. A large block trade in 10-year bond futures shortly afterwards indicated this was cheap enough for at least one trader. Within a few hours, the yield was back to about 4.43%, adding about $5 million to the block’s value.
Yields retreated further from session highs as benchmarks for crude oil and U.S. stocks fell, boosting demand for bonds. They stayed higher during the week, with the S&P 500 hitting near-record highs and Fed Chairman Jerome Powell saying there is no clear need to cut rates.
“The 10-year Treasury bond yielding 4.5% is incredibly attractive,” said Mike O’Rourke, chief market strategist at Jonestrading. “And when equities give up ground, there is good demand for government bonds.”
The futures block trade consisted of 16,000 December contracts with a term of 10 years. The identities of traders are not disclosed.
The market’s earlier declines signaled a drop in confidence in a rate cut next month, as retail sales data was seen as supporting Powell’s cautious stance.
On the swap market, traders temporarily priced in a chance of only 50% on Friday. Fed policymakers opted for a quarter-point cut at their December meeting, down from about 80% earlier this week. As the bond market stabilized, the chances of a rate cut in December recovered to around 60%.
“There is little support for Fed easing,” said Bob Sinche, a market veteran and strategist at Global Macro & Markets. “Chairman Powell has expressed uncertainty about the need for a rate cut in December and today’s data does not convincingly point in favor of an immediate rate cut.”
Other Fed officials speaking Friday avoided giving signals about December. Boston Fed Chair Susan Collins said on Bloomberg Television that the central bank’s decision will be guided by incoming data and that a cut remains possible. Chicago Fed Chief Austan Goolsbee said that as long as inflation continues to decline toward the central bank’s 2% target, interest rates will be “a lot” lower over the next 12 to 18 months.
