The US Treasury building in Washington, DC.
(Bloomberg) — Treasury yields climbed this week as traders scaled back expectations for a Federal Reserve rate cut in December following hawkish signals from Chair Jerome Powell and signs of resilience in the US economy.
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The yield on 10-year notes closed around 4.09% on Friday after starting the week below 4%. The move reflects a shift in market sentiment with interest-rate swap contracts tied to the Fed’s December meeting now implying roughly even odds of a rate cut.
While policymakers delivered on their second-consecutive rate reduction on Wednesday, Powell sparked a market selloff by saying further easing at the last meeting of the year “is not a forgone conclusion.”
Gregory Faranello, head of US rates trading and strategy at AmeriVet Securities, said that some of the “froth” in rate-cut expectations has come off, calling it a rational adjustment.
“The lower rate story in the US needs to be an economic slowdown story,” he said.
Investors had been wagering the Fed would continue to ease borrowing costs to help prop up a sagging labor market, even as inflation remains above the central bank’s target.
But the US government shutdown has halted the release of key economic data, leaving traders with fewer signals on which to base their bets and giving Powell’s comments added importance.
Meta Platforms Inc.’s $30 billion bond sale this week showed corporate spending remains robust and put pressure on Treasuries as investors absorbed new supply. More corporate deals are expected next week.
What Bloomberg Strategists say…
“Despite hawkish comments from Fed Chair Jerome Powell on Wednesday and other Fed officials since, the odds are split on a December cut, keeping demand in the short end, while concerns about inflation are driving yields higher out the curve. What’s more, the upcoming auction schedule bodes well for the curve to keep steepening with back-end supply via 10s and 30s starting the second week of November.”
—Alyce Andres, Macro Strategist, Markets Live
For the full analysis, click here.
Faranello said yields could remain “under a touch of pressure once month end clears.” He pointed to 4.20% to 4.25% on the 10-year note as recent highs.
Adding to the recalibration, Dallas Fed President Lorie Logan said in prepared remarks on Friday that she “did not see a need to cut rates this week.” Meanwhile, Kansas City Fed President Jeff Schmid outlined the reasons for his dissent against the cut and Cleveland Fed President Beth Hammack said she disagreed with it.