Treasuries on course for third weekly gain amid Fed hopes

by Carter Johnson and Ye Xie

US Treasuries were headed for a third week of advances, rallying on Thursday after economic data releases reinforced bets that the Federal Reserve will cut interest rates at least twice this year. 

The move pushed down yields across maturities, with most tenors falling to the lowest level in more than a month. A Bloomberg Treasuries index has returned about 0.6% for the week.  

“We’re going to continue to rock and roll for a few reasons, in terms of lower yields,” said Andrew Brenner, head of international fixed income at NatAlliance Securities. “There’s a real fear out there that the unemployment number a week from today is going to be a lot weaker. We’ll have month-end on Monday which could see some reallocation from equities to bonds.”

Traders are turning their attention to the jobs report as it will provide a key data point ahead of the Fed’s meeting later in the month. They are already fully pricing in two cuts by year-end, starting in September, and wagers on a third quarter-point reduction could gain momentum if the number is weak.

On Thursday, the growth rate for personal spending during the first quarter — part of a revision to US first-quarter gross domestic product — was unexpectedly revised to 0.5% from 1.2%. Other economic data points — including fewer-than-expected initial jobless claims — showed unexpected strength. 

Short-dated bonds — which are more tied to the outlook for Fed policy — gained the most following the release, with two-year yields dipping seven basis points to 3.71% by the end of the session. The widely watched spread between the five- and 30-year points increased to more than 101 basis points for the first time since 2021 and a $44 billion auction of seven-year notes was well received. A steepening yield curve is generally associated with expectations for Fed rate cuts. 

Some bonds were already gaining before the economic data releases following a report in the Wall Street Journal suggesting President Donald Trump is considering naming a successor to Fed chief Jerome Powell as soon as September or October. 

“Today’s data showed further weakness,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management. In addition, the potential early announcement of the next Fed Chair “and perceived less Fed independence will likely contribute further to the steepener move.”

Investors and analysts reckon Powell’s replacement will grant the president’s demands that the Fed cut interest rates right away causing traders to price in faster and deeper cuts beginning around mid-2026, when Powell’s term ends. Fed Governors Christopher Waller and Michelle Bowman in the past week have signaled they’d be open to lowering rates as soon as the next meeting. 

“Waller and Bowman pushing for early rate cuts has helped the front end to rally, with the curve steepening in the process,” said Mark Dowding, chief investment officer of the BlueBay Fixed Income unit at RBC Global Asset Management. “Trump’s move to announce a Fed Chair early can increase political pressure on the Fed to cut rates and this is also a factor leading to a steeper curve.”

Wagers on lower interest rates weighed on the dollar, which weakened against all of its Group-of-10 peers. The Bloomberg’s Dollar Spot Index slumped 0.5% to the lowest level in more than three years. Michael Pfister, an FX analyst at Commerzbank AG, says the euro could climb to $1.18 in the coming days if policymakers continue to price in earlier rate cuts.

Potential contenders to succeed Powell include former Fed Governor Kevin Warsh, current Fed Governor Christopher Waller, National Economic Council Director Kevin Hassett, former World Bank President David Malpass and US Treasury Secretary Scott Bessent, Bloomberg News has previously reported.

Last week, US rates traders amassed a record futures bet that whomever Trump appoints will lead the central bank to cut interest rates almost immediately.

In a Bloomberg Television interview, BlackRock Inc. portfolio manager Russell Brownback said the market would push back if the Fed’s independence began to come into question. 

“The markets would protest any kind of degradation of that independence very quickly,” he said. “I believe in the sanctity of the institution.”

Copyright Bloomberg News