By David Randall
NEW YORK (Reuters) – A series of upcoming economic reports and Federal Reserve Chairman Jerome Powell’s testimony before Congress could push U.S. government bonds out of a tight trading range.
Yields on benchmark 10-year US Treasury bonds, which move inversely with bond prices, have risen between about 4.20% and 4.35% since mid-June, as the market digests data showing slowing inflation and signs of slowing economic growth in some indicators. The yield on the 10-year bond reached 4.33% on Friday.
So far, economic data has failed to dispel doubts about how deep the Fed will be able to cut interest rates this year, keeping Treasury yields in range. But next week’s U.S. jobs data, followed by inflation figures and an appearance by Powell could change that outlook.
“The market has settled into the narrative that we may see increasing weakness but not a growth panic,” said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions. “That will continue to keep us in this range, but the only thing that will push it down significantly is a rise in the unemployment rate.”
A report released on Friday showed that monthly U.S. inflation as measured by the Personal Consumer Expenditure Price Index was unchanged in May, reinforcing the narrative of sluggish inflation and resilient growth that has dampened bond market volatility and supported stocks in recent weeks. However, futures contracts linked to the federal funds rate showed that traders expect interest rates to be cut by just under 50 basis points for this year.
Hugh Nicola, head of fixed income at Jane Trust, said that market reactions to the employment data, scheduled for release next Friday, may be exacerbated by the decline in liquidity during a week when many US bond traders will be on vacation for the US Independence Day holiday on the Fourth of July. /July.
“The market is waiting for the other shoe to drop.”
A recent survey by BofA Global Research showed that fund managers have the lowest weighting in bonds since November 2022. Some believe that means yields could fall further if weak data strengthens the case for further rate cuts and prompts increased allocations to fixed income.
Other highlights of the month include consumer price data due July 11. Powell is scheduled to deliver his semiannual monetary policy testimony on July 9 before the Senate Banking Committee, the office of committee chairman Sen. Sherrod Brown said Monday. If tradition continues, the Fed chairman will deliver the same testimony before the House Financial Services Committee the following day.
But some investors aren’t convinced that Treasury yields will continue to fall. Despite slowing recently, inflation has proved more stubborn than expected this year, forcing the Federal Reserve to rein in expectations of how aggressively it can cut interest rates. And a recent unexpected rebound in inflation in Australia underscored how difficult it is for some central banks to keep consumer prices in check.
Meanwhile, some investors believe inflation is unlikely to return to pre-pandemic levels and the U.S. economy is likely to show a greater level of fundamental strength, limiting the long-term downside for bond yields, said Thierry Wezeman, global currency and interest rate strategist at Macquarie Group.
“The market has gotten more used to the idea that the Fed rate cut will not be as big as people expected a few months ago,” Weizmann said. “People have adjusted their expectations but there is a limit to how much yields can fall in a single month of bad data.”
(Reporting by David Randall; Editing by Ira Iosibashvili and Richard Chang)