The rout in US government debt paused as investors turned their attention to bond auctions and a key inflation report for clues on the Federal Reserve’s next steps.
Treasuries advanced, led by the short-end, as bets on interest-rate cuts stabilized after a hawkish repricing in recent days. The two-year yield fell as much as six basis points to 3.94% and the 10-year rate fell three basis points to 3.99%.
Strong jobs data at the end of last week shocked traders betting on another big cut from the Fed this year and revived concern inflation could reignite. Now investors are focusing on Thursday’s CPI print, which is expected to show a gradual slowdown in the pace of price growth. They’ll also be looking at the level of appetite for three- and 10-year bonds at auctions on Tuesday and Wednesday, respectively.
“The US data is not so strong that the Federal Reserve’s contribution to the global rate-cutting cycle looks set to end,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
Haefele says investors still need to position for lower rates, anticipating two half-point reductions from the Fed in November and December. He’s confident inflation data offer little impediment to additional easing.
Traders are currently wagering on around 50 basis points of easing from the US central bank by the end of the year, with less than 150 basis points of easing priced through October 2025. That’s down from expectations for about 200 basis points of reductions in late September.
US bonds tumbled on Monday, hoisting key yields above the level of 4% which was last seen in August. The scaling-back of Fed expectations poured cold water on a bond buying frenzy that helped Treasuries clock five straight monthly gains.
“The market did get a bit ahead of itself in pricing Fed cuts,” said Patrick Armstrong, chief investment officer at Plurimi Wealth on Bloomberg TV. “I do think in 2025 inflation will likely become a problem again.”
Attention is returning to inflation trends, with Fed Governor Adriana Kugler saying the US central bank should keep its focus on bringing inflation back to its 2% target and that she “strongly supported” last month’s half-point reduction. Meanwhile, Federal Reserve Bank of St. Louis President Alberto Musalem cautioned that further reductions should be gradual.
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