US Treasuries experienced a noticeable decline as investors reacted to recent job market data and a new US-UK trade framework, which prompted a shift towards riskier assets and a reduction in expectations for interest rate cuts. On Thursday, yields on two- to 10-year Treasuries rose by at least 10 basis points, with 30-year bond yields increasing about eight basis points to reach 4.85%, following an auction that saw lower-than-expected investor interest.
George Catrambone, head of fixed income at DWS Americas, commented, “The hard data has not yet followed the soft data. A trade deal is done. Risk appetite is better. The Fed is in no hurry.” These developments have led to a decrease in the market’s pricing for potential rate cuts.
Currently, options for a quarter-point rate cut at the Federal Reserve’s upcoming meeting in June are at 15%, down from approximately 30% on Tuesday and over 50% last week. Markets are now predicting only three cuts this year, which would bring rates to a range of 3.5% to 3.75%. Just a few weeks prior, four rate cuts were fully anticipated.
As short-term yields have begun to rise, traders have adjusted their views on interest rate cuts following comments from Fed Chair Jerome Powell, who indicated that the central bank does not plan to lower borrowing costs in the immediate future. The Fed’s policymakers have cautioned about potential increases in inflation and rising unemployment, although Powell noted that the labor market remains robust, as evidenced by a decrease in weekly jobless claims.
The S&P 500 saw gains on Thursday, following President Trump’s announcement of what he claims to be a comprehensive trade agreement with the UK—a significant development as he seeks to establish trade deals globally. Concurrently, the Bloomberg Dollar Spot Index rose by 0.7%, marking its largest increase in over a month.
Trump reiterated his criticism of the Fed’s policies, expressing that he believes inflation is virtually nonexistent in the US and suggesting that Powell lacks a clear understanding of the economic situation. He has been vocal in calling for the central bank to reduce rates to stimulate economic growth and hinted at the possibility of removing the Fed Chair before the end of his term.
This economic landscape highlights the balancing act faced by the Federal Reserve as they navigate between supporting growth and managing inflationary pressures. The combination of increased investor confidence from trade developments and the stable job market reflects a cautious optimism in the economy’s prospects.