By David Randall
NEW YORK (Reuters) – A series of upcoming economic reports and testimony to Congress from Federal Reserve Chairman Jerome Powell could lift U.S. Treasury bonds out of a narrow trading range.
Yields on benchmark U.S. 10-year Treasuries, which move inversely to bond prices, have risen between about 4.20% and 4.35% since mid-June as the market processed data showing slowing inflation and signs of cooling economic growth in some indicators showed. The 10-year yield stood at 4.33% on Friday.
So far, economic data has failed to dispel doubts about the extent to which the Fed will be able to cut rates this year, keeping Treasury yields within a certain range. But next week’s US employment data, followed by inflation figures and Powell’s actions could change that outlook.
“The market has settled into a narrative that we may see some gradual softening, but not growth fears,” said Garrett Melson, a portfolio strategist at Natixis Investment Managers Solutions. “That will keep us in this range, but the only thing that will push it significantly lower is a rise in the unemployment rate.”
US monthly inflation, as measured by the personal consumption expenditures (PCE) price index, was unchanged in May, according to a report published on Friday. This advances the story of slowing inflation and resilient growth that have curbed bond market swings and supported stocks in recent weeks. Still, futures tied to the Fed Funds rate showed traders had priced in just under 50 basis points of rate cuts for the year.
Market reactions to jobs figures due next Friday could be exacerbated by low liquidity in a week when many U.S. bond traders are on vacation for the July 4 Independence Day holiday, said Hugh Nickola, head of fixed income at GenTrust.
“The market is waiting for the next shoe to drop.”
A recent survey from BofA Global Research found that fund managers have been the most underweight bonds since November 2022. Some believe rates could fall further if weakening data strengthens the case for more rate cuts and encourages greater allocation to fixed income.
Other highlights for the month include consumer price data scheduled for July 11. Powell is expected to deliver his semiannual testimony on monetary policy before the Senate Banking Committee on July 9, the office of chairman Sen. Sherrod Brown said Monday. If tradition holds, the Fed chairman will give the same testimony before the House Financial Services Committee the following day.
Some investors are not convinced that government bond yields will fall much further. Despite the recent cooling, inflation has proven more persistent than expected this year, forcing the Fed to rein in expectations about how aggressively it can cut rates. A recent unexpected recovery in inflation in Australia underlined how difficult it has been for some central banks to keep consumer prices in check.
At the same time, some investors believe that inflation is unlikely to return to pre-pandemic levels and the US economy is likely to exhibit a higher degree of underlying strength, limiting the downside for longer-term bond yields, according to Thierry Wizman, global FX and interest rate strategist at Macquarie Group.
“The market has gotten much more used to the idea that when the Fed cuts rates, they’re not going to cut as much as people thought a few months ago,” Wizman said. “People have adjusted their expectations, but there’s a limit to how much yields can fall on one month of bad data.”
(Reporting by David Randall; Editing by Ira Iosebashvili and Richard Chang)
