(Bloomberg) — Treasuries rallied as traders boosted bets on Federal Reserve interest-rate cuts, with US President Donald Trump’s tariff plans weighing on risk appetite.
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Yields on 10-year US bonds (^TNX) fell as much as seven basis points to 4.33%, the lowest level in over two months. Money markets implied more easing from the Fed, fully pricing two quarter-point reductions this year for the first time in four weeks.
Markets are growing more confident that the US economy is weakening and interest-rate reductions will resume, as uncertainty around the Trump administration’s policies weighs on business expectations. An auction of two-year notes drew strong demand on Monday, after data Friday showed the services sector contracted for the first time in two years in February.
“Red flags are emerging for the US economy,” said Elias Haddad, senior market strategist at Brown Brothers Harriman. “Another month or two of poor US economic data would deliver a blow to the US exceptionalism narrative.”
Swaps are now pricing 54 basis points of easing from the Fed by the end of the year, compared to 48 basis points on Monday. The yield on two-year Treasuries fell five basis points to 4.12% as of 11:30 a.m. in London.
What Bloomberg strategists say...
“The narrative shifted on Monday, from ‘the new US administration isn’t yet delivering on our pro-growth expectations’ to ‘US policies may be starting to cause real economic damage.’ ... That’s why US 10-year yields are at their lowest level in more than two months and likely to head a chunk lower again over the coming weeks.”
— Mark Cudmore, MLIV Executive Editor, Singapore.
Attention turns to an auction of $70 billion five-year notes, alongside commentary from the Fed’s Vice Chair for Supervision Michael Barr on financial stability and the Fed’s Bank of Richmond President Tom Barkin on inflation.
The Fed’s Bank of Dallas President Lorie Logan, speaking in London on the future of the central bank’s balance sheet, said it would be appropriate in the medium term for the Fed to purchase more shorter-term securities than longer-term ones so that its portfolio can more quickly mirror the composition of Treasury issuance.
The US central bank is currently winding down its Treasury holdings and traders are on alert for any clues it’s set to pause or slowdown its balance-sheet runoff, after minutes from last month’s Fed meeting revealed discussions on the matter. Logan did not comment about the timing of such a slowdown or pause in Tuesday’s remarks.