A series of upcoming economic reports and congressional testimony from Federal Reserve Chairman Jerome Powell could push U.S. government bonds out of a narrow trading range.
Yields on 10-year U.S. Treasuries, which move inversely to bond prices, have hovered between 4.20% and 4.35% since mid-June as the market digested data showing a slowdown in inflation and signs of slowing economic growth in some indicators. The 10-year yield stood at 4.33% on Friday.
Economic data so far has failed to dispel doubts about how much the Fed will be able to cut interest rates this year, keeping bond yields high. Treasure in a low range. But next week, US jobs data, followed by inflation figures and Mr Powell’s intervention, could change the situation.
“The market has settled into a logic that we could see a gradual slowdown, but not a growth scare,” said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions. “That will continue to keep us in that range, but the only thing that will push it down significantly is an increase in the unemployment rate.
U.S. monthly inflation as measured by the Personal Consumption Expenditures (PCE) Price Index remained unchanged in May, according to a report released Friday, supporting the view of slowing inflation and resilient growth which has dampened bond market fluctuations and supported stocks in recent weeks. Still, futures tied to the federal funds rate showed traders pricing in rate cuts for the year at just under 50 basis points.
Market reactions to the jobs data, due next Friday, could be exacerbated by low liquidity in a week when many U.S. bond traders will be on vacation for July 4, Independence Day. of the United States, said Hugh Nickola, head of fixed income at GenTrust.
“The market is waiting for the other shoe to drop.”
A recent BofA Global Research survey showed that fund managers were the most underweight in bonds since November 2022. Some believe this means yields could fall further if weaker data strengthens the case for further declines rates and stimulate the increase in allocations in favor of fixed income securities.
Other highlights of the month include consumer price data due July 11. Mr. Powell is expected to deliver his semiannual testimony on monetary policy on July 9 before the Senate Banking Committee, the office of its chairman, Senator Sherrod Brown, said Monday. If tradition continues, the Fed Chairman will make the same testimony before the House Financial Services Committee the next day.
Some investors are unconvinced that Treasury yields can fall much further. Despite its recent slowdown, inflation has proven more stubborn than expected this year, forcing the Fed to lower its forecast for the size of rate cuts. A recent unexpected rebound in inflation in Australia highlighted the difficulties some central banks are having in keeping consumer prices in check.
At the same time, some investors believe inflation is unlikely to return to pre-pandemic levels and the U.S. economy is expected to show a higher level of underlying strength, limiting the decline to long-term bond yields, said Thierry Wizman, global FX and rates strategist at Macquarie Group.
“The market has gotten much more used to the idea that when the Fed cuts rates, it’s not going to be as big as people thought a few months ago,” Wizman said. “People have adjusted their expectations, but there’s a limit to how much yields can go on a month of bad data.
