By Karen Brettell
NEW YORK (Reuters) - A weakening economy and what looks to have been an overly aggressive "Trump trade" has led some Treasury market participants to reevaluate calls for how high U.S. yields will go as speculation the Federal Reserve may cut rates several times this year re-emerge.
Yields tumbled after data on Friday showed U.S. business activity nearly stalled in February, while consumer fears about inflation surged. Data on Monday further showed U.S. consumer confidence deteriorated at its sharpest pace in 3-1/2 years in February.
Government job cuts by Elon Musk's Department of Government Efficiency (DOGE) are raising fears they will lead to a weaker labor market and hit consumer spending. The Citigroup economic surprise index also fell further into negative territory, indicating data is coming in worse than economists predicted.
Peter Tchir, head of macro strategy at Academy Securities, has cut his target on 10-year Treasury yields to 4.6%, after formerly expecting 4.8% or higher, and said “I'm beginning to think that that might even be too high.”
“It does feel like this growth prospect isn't materializing,” Tchir said. “There's so much noise coming out of DC, or Mar-a-Lago, that it's hard to tell what to focus on," he said referring to President Donald Trump's Florida resort and residence. "But I feel like everything now is giving people pause and hesitancy and it doesn't take long for that to feed into the economy or market.”
Trump's election in November raised expectations for stronger economic growth on looser business regulations and the potential for more tax cuts. Tariffs and a crackdown on illegal immigration, meanwhile, are seen as potentially adding to inflation.
Data from December reinforced the perception of a robust economy, which along with inflation concerns prompted the Fed to pause the easing cycle that brought its policy rate down a full percentage point since its initiation in September.
That sent Treasury yields higher and led investors to cut bets on how many times the Fed will cut rates this year.
The benchmark 10-year yield traded as low as 3.60% in September before traders began pricing in higher odds of a Trump victory. It reached 4.81% in January, a 14-month high and was at 4.31% on Tuesday.
Now, some analysts say benefits of Trump’s fiscal shifts may take longer to be realized. And DOGE's cost cutting, while potentially improving the fiscal picture longer term, could hurt the economy in the shorter run.
“The risk in the short term is that many of the layoffs that the federal government has undertaken in the last four weeks create a short-term downdraft in consumer spending, and that expands into more material economic slowing,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.