(Bloomberg) — U.S. Treasury bonds fell off their session highs late Friday after a closely watched set of inflation data came in below expectations, prompting traders to raise prospects for Federal Reserve rate cuts next year.
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The policy-sensitive two-year government bond yield was slightly lower at 4.31% late Friday afternoon, after falling to 4.25% early. The benchmark 10-year yield fell 4 basis points to 4.51% in late trading. The moves this week reversed a sharp steepening trend that had pushed part of the yield curve to its steepest since 2022. Government bonds held on to their early gains after a University of Michigan survey showed US consumer confidence rose for a fifth month in December.
Data earlier Friday showed the main price index of personal consumption expenditures, the Fed’s preferred measure of underlying inflation, rose 0.1% in November from October and 2.8% from a month earlier. year earlier – both levels slightly below consensus forecasts.
Swap traders are pricing in about 39 basis points of the total Fed cuts next year, which amounts to less than two full quarter-point cuts. But many on Wall Street expect the central bank to cut even more.
“We expect more Fed cuts next year,” Subadra Rajappa, head of U.S. rates strategy at Societe Generale, said on Bloomberg Television. She said the firm’s economists expect four quarter-point Fed cuts next year. “The way the economy is going, you should see a moderation in growth, you should see a moderation in employment, and a moderation in inflation,” she said.
Pressure on long-term debt has pushed 10-year Treasury yields the most above two-year yields since 2022 this week.
The steepening came after the Fed signaled on Wednesday that interest rate cuts would be slower next year given signs of persistent inflation. The median of Fed officials’ quarterly forecasts implied a two-quarter-point rate cut in 2025, down from the four steps they forecast in September.
“The Fed is trying to communicate a shift to the next phase in the easing cycle,” said Julian Potenza, portfolio manager at Fidelity Investments. “Overall, there is a fairly broad spread of possible outcomes for policy next year, but for us we think the base case is likely to be a continuation of a modest easing cycle.”
In addition, concerns that President-elect Donald Trump’s policies will boost spending and widen deficits have investors wary of putting cash into U.S. securities that won’t mature for a decade or more.
Unwinding certain positions after a volatile week can help reverse some of the steepening trade. However, investors like Michael Hunstad, deputy chief investment officer at Northern Trust Asset Management, which oversees $1.3 trillion, still see the trend continuing.
“Our view is certainly that the yield curve is steepening,” he said.
–With help from Michael Mackenzie.
(Clears prices throughout, starting in the second paragraph.)
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