US Treasuries Stabilize Amidst Rate Cut Uncertainty
US Treasuries remained stable on Friday, following a volatile week where traders confronted the likelihood of a lengthy delay in future interest rate cuts.
The two-year yield closed at 4.29%, marginally unchanged from its position at the end of the previous week, despite a 10 basis point surge earlier in the week. The 10-year yield also saw minimal movement, hovering just above 4.50%.
Later today, the release of US retail sales data for January could potentially boost the debt market if results indicate a slowdown due to inclement weather. This could ignite expectations of more aggressive policy easing in the coming year, increasing demand for government bonds.
Treasuries gained some relief on Thursday after a producer price report mitigated the impact of unexpectedly high consumer inflation data earlier in the week. A survey published by Bank of America Corp. on Friday revealed that investors have become less pessimistic about US bonds, with fewer anticipating that the 10-year yield will exceed 5% this year and more predicting that it will fall below 4%. However, participants also expressed increased uncertainty, reflecting the complex macroeconomic outlook.
"These are challenging trading environments," stated Evelyne Gomez-Liechti, strategist at Mizuho International. Despite the volatility, she advises selling significant rallies in US dollar rates.
Wednesday's inflation figures served as a stark reminder that price pressures must further subside before the Federal Reserve can consider another round of interest rate cuts. The easing path is now uncertain as President Donald Trump's tariff threats raise concerns about a global trade war.
"The primary risk for 2025 is a resurgence in inflation, prompting the Fed to increase interest rates," said Nicolas Trindade, senior portfolio manager at AXA Investment Managers. "The market is not pricing in this possibility."
Short-dated inflation-protected Treasuries have gained traction due to the growing demand for inflation protection. The two-year yield is approaching a potential fall below 1% for the first time since 2022. However, AXA Investment Managers prefers European bonds to US bonds, expressing skepticism about an interest rate cut this year, in contrast to the 30 basis point easing implied by overnight interest-rate swaps.