The $27 trillion U.S. government-debt market concluded a momentous week of trading that sent the 10-year Treasury yield down to an 11-week low of 4.212% and could have even more room to run.
The drop in the widely followed 10-year Treasury yield BX:TMUBMUSD10Y, which acts as the benchmark for an array of borrowing costs in the U.S. economy, was due to a four-day rally triggered by May’s cooler-than-expected
consumer-price index
and an unexpected drop in
producer prices
last month. The pair of reports, released on Wednesday and Thursday, overshadowed a hawkish, mid-week message from the Federal Reserve and its chairman, Jerome Powell.
Friday marked the end of a week that BMO Capital Markets strategists Ian Lyngen and Vail Hartman described as a clear “regime shift.” Meanwhile, Ralf Preusser and Mark Cabana at BofA Securities continued to put a 10-year Treasury yield of as low as 4% on the map and recommended that investors “buy on dips.” The 10-year yield fell 21.6 basis points this week —producing its largest weekly decline since the period that ended on Dec. 15, or about the same time Fed officials had penciled in three quarter-point rate cuts for this year.
“What a week it’s been,” said Gregory Faranello, head of U.S. rates trading and strategy for AmeriVet Securities in New York. “There are multiple camps out there regarding rates as we exit this week’s [Fed] meeting: 1. The Fed needs to get on with rate cuts. 2. The narrative will shift toward hiking more in the next six months. 3. The Fed needs to do nothing.”
Traders and investors in the bond market are in the process of readjusting their expectations for the likely path of interest rates on the possibility that the Fed might turn out to be too cautious about inflation and wrong about its ability to cut interest rates just once this year. As of Friday, fed-funds futures traders were pricing in a 61.4% chance that the first quarter-point rate cut will arrive by September, and 72.5% chance of at least two rate cuts by year-end.
U.S. government debt rallied for a
fourth straight day
on Friday, sending 2- BX:TMUBMUSD02Y, 10-, and 30-year Treasury yields BX:TMUBMUSD30Y all lower. Over the past two weeks, the 10-year yield has fallen 30 basis points. That’s its biggest two-week decline since last December.
Only a week ago, it seemed like the case for any Fed rate cuts this year had evaporated after the U.S. economy created a shocking
272,000 new jobs
in May. At the start of this year, traders had expected as many as six or seven rate cuts for 2024, but pulled back on those expectations as the months rolled on.
Traders appear to now be embracing a more Goldilocks view of the economy in which inflation can continue to ease as the economy slows, even with fewer rate cuts — a contrast to their earlier multiple-rate-cut view. A scenario in which the Fed delivers just one or two rate cuts this year would suggest that economic growth and corporate earnings can continue to hold up despite the highest interest rates in 23 years, at between 5.25% to 5.5%.
The last time that the 10-year yield traded at or below 4% during one trading session was
in February,
when concerns were growing about the conditions of regional banks and the labor market.