(Bloomberg) — The Treasury rose on Friday and was on track for a small weekly gain after survey data showed signs of a U.S. economic cooling.
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Yields were at least two basis points lower, with short maturity down nearly four basis points. The session lows were reached after an unexpected decline in S&P Global’s services gauge and a downward revision to the University of Michigan sentiment gauge, both for January. Rally Left Treasury left slightly lower on the week, which began with the inauguration of Donald Trump to a second non-consecutive presidential term.
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The data reinforces the view that the Federal Reserve – which meets from January 28-29 – will cut interest rates at least once this year as early as June, after cuts at each of its last three meetings. Bonds also benefited from the lack of immediate action by Trump to impose tariffs on imports, although he has said he intends to.
“With a data-driven Fed, the market is focused on every economic release,” said Christian Hoffman, portfolio manager at Thornburg Investment Management. At the same time, “politics will remain a major driver of volatility and uncertainty.”
Financial markets and economists surveyed by Bloomberg are unanimous in expecting Federal Reserve Chair Jerome Powell and his colleagues to maintain the 4.25%-4.5% target range for the US interest rate next week. Looking ahead, swap rates now favor quarter-point cuts by the end of the year. A week ago, only one was expected.
Bonds began selling off in September, pushing 10-year yields to a 14-month high of 4.8% earlier this month, reflecting concerns that trade protectionism could lead to inflation. Benign inflation data for December released on January 15 fueled Governor Christopher Waller’s comment the next day that a mid-year rate cut remained a possibility of bleeding.
Short-term Treasury yields, more sensitive than long-term ones to assessment changes by the Fed, moved the most this week. The 10-year yield is 36 basis points higher than the two years, versus 34 basis points a week ago. Open interest data for the Treasury future suggests that investors expect a further steepening of the curve.
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