(Bloomberg) — Treasuries erased modest losses, with yields turning lower by a couple of basis points, after benign inflation readings accompanied April personal income and spending data.
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The data left intact expectations the Federal Reserve will cut interest rates at least once by year-end. Two-year notes, more sensitive than longer maturities to changes in Federal Reserve policy, saw yields briefly dip below 4.91% to the lowest level since Tuesday.
Two-year Treasury yields approached 5% earlier this week amid signs that ebbing expectations for Fed rate cuts in recent months was hurting demand for sales of new notes and bonds.
“There is really no urgency for the Fed to cut rates this year,” Subadra Rajappa, head of US rates strategy at Societe Generale, told Bloomberg Television after Friday’s data. Still, two-year yields over 5% “would require the Fed to either hike or not cut for the next year.”
With the market pricing in “very few cuts between now and the middle of the next year,” investors are disposed “to continue to plow money into the very front end of the yield curve, not so much in the long end,” she said.
Overnight index swaps contracts tied to upcoming Fed policy meetings continue to fully price in a quarter-point rate cut in December, with the odds of a move as soon as September edging up to around 50%. For all of 2024, the contracts imply a total of 34 basis points of rate reductions, up slightly from the close on Thursday.
The price index for April personal spending was up 2.7% from a year earlier, unchanged from March. This measure of inflation preferred by the US central bank has exceeded its price stability target of 2% since March 2021.
Market attention from here will focus on flows associated with Friday’s month-end rebalancing of bond indexes to incorporate securities created during the month, which has the potential to spur buying by passive investors.
Auctions held during the month of 10-, 20- and 30-year new issues will contribute to an estimated 0.10-year increase in the duration of the Treasury index. While larger than the monthly average, it’s a smaller increase than has been typical for the month over the past decade, as the Treasury has disproportionately increased auction sizes for its shorter-maturity notes such as the two- and five-year.
(Adds quote, updates yield levels.)
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