Treasuries rise ahead of US inflation data

A selloff in global bonds paused as traders waited for US inflation to shed light on whether the Federal Reserve will be able to cut interest rates this year.

Treasuries gained on Friday after a rout this week pushed yields to their highest levels of the year, with European rates following suit. Japan’s benchmark notes advanced after the nation’s central bank kept its key interest rate unchanged.

Investors now await a series of US inflation reports to fine tune their bets on when the Fed will begin cutting interest rates. Evidence that price growth remains sticky has pushed the expected start date back by months over recent weeks, with traders now only fully pricing a quarter-point reduction by December.

“All eyes are on the PCE today and on inflation prints in the next few weeks,” said Justin Onuekwusi, chief investment officer at St James Place Management, referring to the the Fed’s preferred gauge — the personal consumption expenditures price index — which is due later.

The data is projected to show the annual rate rose to 2.6% last month, from 2.5% in February. That would suggest progress toward the Fed’s 2% goal has stalled.

“The jury is still out on whether this is a temporary blip or a significant inflation breakout,” Onuekwusi added.

US 10-year Treasury yields fell three basis points to 4.68%. German equivalent rate dropped by the same amount to 2.60%.

Economic data on Thursday was the latest to force Wall Street to temper its expectations for lower borrowing costs in the world’s top economy. Gross domestic product increased at a 1.6% annualized rate last quarter, while a closely watched measure of underlying inflation advanced at a greater-than-expected 3.7% clip.

US policymakers will then convene next week and announce an updated policy statement. Attention will likely focus on any commentary from Chair Jerome Powell on recent data and the implications for the rate path ahead. 

In March, Fed officials laid out a forecast of three quarter-point cuts in 2024. Employment data at the end of next week will also offer more clarity about the economy.

To Sinead Colton Grant, chief investment officer at BNY Mellon, the “biggest danger” for investors is to focus on the number of rate cuts this year — and “lose sight of the big prize, which is the ability to add a better diversifier for your portfolio at a higher yield level.”

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