By David Randall
NEW YORK (Reuters) – A series of upcoming economic reports and testimony from Federal Reserve Chairman Jerome Powell before Congress could push U.S. government bonds out of a tight trading range.
Yields on benchmark 10-year US Treasury bonds, which move inversely with bond prices, have risen between about 4.20% and 4.35% since mid-June, as the market digests data showing slowing inflation and signs of slowing economic growth in some indicators. The yield on the 10-year bond reached 4.33% on Friday.
So far, economic data has failed to dispel doubts about how far the Fed will go in cutting interest rates this year, keeping Treasury yields rangebound. But next week’s U.S. employment data, followed by inflation figures and Powell’s appearance, could change that outlook.
“The market has settled into a narrative that we may see gradual weakness but not a fear of growth,” said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions. “This will continue to keep us in that range, but the only thing that will push it meaningfully lower is an increase in growth.” Unemployment rate”.
A report released on Friday showed that monthly U.S. inflation as measured by the Personal Consumer Expenditure Price Index was unchanged in May, reinforcing the narrative of sluggish inflation and resilient growth that has dampened bond market volatility and supported stocks in recent weeks. However, futures contracts linked to the federal funds rate showed that traders expect interest rates to be cut by just under 50 basis points for this year.
Hugh Nicola, head of fixed income at Jane Trust, said market reactions to Friday’s jobs data could be exacerbated by low liquidity during a week when many U.S. bond traders will be off for the July Fourth holiday.
“The market is waiting for the other shoe to drop.”
A recent survey by BofA Global Research showed that fund managers have the lowest weighting in bonds since November 2022. Some believe that means yields could fall further if weak data strengthens the case for further rate cuts and prompts increased allocations to fixed income.
Other highlights of the month include consumer price data due July 11. Powell is scheduled to give his semiannual monetary policy testimony on July 9 before the Senate Banking Committee, the office of the committee’s chairman, Sen. Sherrod Brown, said Monday. If tradition continues, the Fed chairman will give the same testimony before the House Financial Services Committee the following day.
But some investors aren’t convinced that Treasury yields will continue to fall. Despite slowing recently, inflation has proved more stubborn than expected this year, forcing the Federal Reserve to rein in expectations of how aggressively it can cut interest rates. And a recent unexpected rebound in inflation in Australia underscored how difficult it is for some central banks to keep consumer prices in check.
Meanwhile, some investors believe inflation is unlikely to return to pre-pandemic levels and the U.S. economy is likely to show a greater level of fundamental strength, limiting the long-term downside for bond yields, said Thierry Wezeman, global currency and interest rate strategist at Macquarie Group (OTC:).
“The market has become more accustomed to the idea that when the Fed cuts rates, it’s not going to cut them as much as people expected a few months ago,” Weissman said. “People have adjusted their expectations but there is a limit to how far returns can fall in a single month of bad data.”
