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 the U.S. 10-year bond, which moves inversely to bond prices, have fluctuated between 4.20% and 4.35% since mid-June as the market digested data showing slowing inflation and signs of slowing economic growth in some indicators. The 10-year yield stood at 4.33% on Friday.
So far, economic data has failed to dispel doubts about the Fed’s ability to cut interest rates this year, keeping Treasury yields range-bound. But next week’s U.S. jobs data, followed by inflation figures and Powell’s appearance, could change that outlook.
“The market has gotten used to a scenario where we could see a gradual slowdown, but not a growth scare,” said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions. “That will keep us in that range, but the only thing that will push it significantly lower is an increase in the unemployment rate.”
Monthly inflation in the United States, as measured by the Personal Consumption Expenditures (PCE) Price Index, remained unchanged in May, according to a report released Friday, advancing the narrative of slowing inflation and of resilient growth that has softened bond market gyrations and supported stocks in recent weeks. Still, futures tied to the federal funds rate showed traders expecting rates to fall just under 50 basis points for the year.
Market reactions to jobs data, due next Friday, could be exacerbated by low liquidity in a week when many U.S. bond traders will be on vacation for the U.S. Independence Day holiday, July 4 , said Hugh Nickola, head of fixed income at GenTrust.
“The market is waiting for the other shoe to drop.”
A recent survey by BofA Global Research showed that fund managers are the most underweight in bonds since November 2022. Some believe this 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 give his semiannual testimony on monetary policy on July 9 before the Senate Banking Committee, the office of its chairman, Senator Sherrod Brown, said Monday. If tradition continues, the Fed Chairman will deliver the same testimony before the House Financial Services Committee the next day.
Some investors aren’t convinced Treasury yields are likely to fall further. Despite its recent slowdown, inflation has proven more stubborn than expected this year, forcing the Fed to rein in expectations for how aggressively it could cut rates. A recent unexpected inflationary rebound in Australia has highlighted how difficult it has been for some central banks to keep consumer prices under control.
At the same time, some investors believe inflation is unlikely to return to pre-pandemic levels and the U.S. economy is expected to show a higher level of underlying strength, limiting the long-term decline. bond yields, said Thierry Wizman, global FX and rates strategist at Macquarie Group.
“The market has gotten much more used to the idea that when the Fed cuts rates, it’s not going to cut them as much as people thought a few months ago,” Wizman said. “People have adjusted their expectations, but there’s a limit to how low yields can go after a month of bad data.”
(Reporting by David Randall; Editing by Ira Iosebashvili and Richard Chang)
