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(Bloomberg) — Treasuries rose on Friday and were on pace for a small weekly gain after survey data showed signs of a cooling U.S. economy.
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Yields were lower by at least two basis points, with maturities shorted by nearly four basis points. The session lows were reached after an unexpected decline in S&P Global services activity and a downward revision to the University of Michigan sentiment gauge, both for January. The demonstration left the Treasury occurs slightly lower than the week, which began with the inauguration of Donald Trump to a second non-consecutive presidential term.
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The data reinforces the view that the Federal Reserve, which meets Jan. 28-29, will cut interest rates at least once this year through June, after cutting at each of its last three meetings. Bonds also benefited from Trump’s lack of immediate action to impose tariffs on imports, although he has said he intends to do so.
“With a data-driven Fed, the market is focused on every economic release,” said Christian Hoffmann, portfolio manager at Thornburg Investment Management. At the same time, “politics will continue to be a major driver of volatility and uncertainty.”
Money markets and economists polled by Bloomberg are unanimous in expecting Fed Chairman Jerome Powell and his colleagues to maintain their target range of 4.25%-4.5 % of the US overnight interest rate next week. Looking further ahead, rate swaps now favor two quarters of cuts at the end of the year. A week ago, only one was predicted.
Bonds began selling off in September, pushing 10-year yields to a 14-month high of 4.8% earlier this month, reflecting concerns that trade protectionism could lead to inflation . December’s benign inflation data was released on January 15, and comments by Governor Christopher Waller fueled the next day that a mid-year rate cut remains possible stopped the bleeding.
Short-term Treasury yields, more sensitive than long-term ones to gauge changes by the Fed, advanced further this week. The ten-year yield is 36 basis points higher than the two-year, up from 34 basis points a week ago. Open interest data for Treasury futures suggests investors are anticipating a further steepening of the curve.
