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By David Randall
NEW YORK (Reuters) – A series of upcoming economic reports and testimony from Federal Reserve Chairman Jerome Powell before Congress could push U.S. government bonds out of a tight trading range.
Yields on benchmark 10-year US Treasury bonds, which move inversely with bond prices, have risen between about 4.20% and 4.35% since mid-June, as the market digests data showing slowing inflation and signs of slowing economic growth in some indicators. The yield on ten-year US Treasury bonds reached 4.33% on Friday.
So far, economic numbers have failed to dispel doubts about how deeply the Fed can cut interest rates this year, keeping Treasury yields within range. But next week’s US employment data, followed by inflation numbers and Powell’s appearance could change those expectations.
“The market has settled into the narrative that we may see increasing weakness but not a growth panic,” said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions. “That will continue to keep us in this range, but the only thing that will push it down significantly is a rise in the unemployment rate.”
Monthly U.S. inflation as measured by the personal consumption expenditures (PCE) price index was unchanged in May, a report released on Friday showed, reinforcing a narrative of slowing inflation and resilient growth that has dampened bond market volatility and supported stocks in recent weeks. However, futures linked to the federal funds rate showed traders pricing in just under 50 basis points of interest rate cuts for this year.
Hugh Nicola, head of fixed income at Jane Trust, said that market reactions to the employment data, scheduled for release next Friday, may be exacerbated by the decline in liquidity during a week when many US bond traders will be on vacation for the US Independence Day holiday on the Fourth of July. /July.
“The market is waiting for the other shoe to drop.”
A recent survey by Bank of America Global Research showed that fund managers are the least overweight in bonds since November 2022. Some believe that means yields could fall further if weak data strengthens the case for further rate cuts and prompts higher allocations to fixed income.
Other highlights of the month include consumer price data due July 11. Powell is scheduled to give his semiannual monetary policy testimony on July 9 before the Senate Banking Committee, the office of the committee’s chairman, Sen. Sherrod Brown, said Monday. If tradition continues, the Fed chairman will give the same testimony before the House Financial Services Committee the following day.
Some investors are not convinced that Treasury yields have much further to fall. Despite its recent slowdown, inflation has proved more stubborn than expected this year, forcing the Federal Reserve to rein in expectations of how aggressively it will cut interest rates. Australia’s unexpectedly high inflation rate has highlighted the difficulty some central banks have had in keeping consumer prices in check.
Meanwhile, some investors believe inflation is unlikely to return to pre-pandemic levels, and the U.S. economy is likely to show a greater level of fundamental strength, limiting the longer-term downside for bond yields, said Thierry Wezeman, global FX and interest rates strategist at Macquarie Group.
“The market has become more accustomed to the idea that when the Fed cuts rates, it won’t cut them as much as people expected a few months ago,” Weissman said. “People have adjusted their expectations, but there’s a limit to how far yields can fall in a single month of bad data.”
