A rally in the $31 trillion Treasuries market stalled after economic data showed steady hiring and consumer spending on goods, offsetting the prospect of an end to the war in Iran that could pave the way for Federal Reserve interest-rate cuts.
Yields were little changed on Wednesday after trimming declines seen earlier in the session as Brent briefly fell below $100 a barrel. Treasury yields have tracked a war-related surge in oil prices for much of the past month because of their potential to stoke inflation and delay Fed rate cuts.
“We had a relief rally from yesterday’s development on the conflict in the Middle East; on the other hand the data are pretty broadly coming in firmer than expectations,” supporting higher yields, said Jan Nevruzi, an interest-rate strategist at TD Securities. The cohort of Fed policymakers that sees energy prices as having “limited impact on inflation but a drag on growth that further softens the labor market” is “a little more suppressed right now.”
February retail sales exceeded economist estimates, as did ADP Research’s estimate of March private-sector hiring. Fed policymakers cut interest rates three times last year in reaction to signs of job-market weakness that have since abated somewhat.
St. Louis Fed President Alberto Musalem, speaking Wednesday, said risks were rising to both inflation and employment, and officials should be prepared to adjust interest rates in either direction depending on how the economy evolves.
Bloomberg Intelligence rates strategists Ira Jersey and Will Hoffman on Wednesday boosted their forecast for the US two-year yield to 3.4% by the end of the year, from nearly 3%, on the likelihood that the Fed will delay rate cuts until at least the final quarter of 2026.
Related research: TIPS Inflation Drives 2-Year Yield; Year-End Forecast Now 3.4%
Yield levels were sustained after the ISM manufacturing report for March, whose overall gauge rose slightly more than anticipated, also included a measure of prices paid by factories that jumped to the highest level since June 2022, a period when the Fed was raising rates.
Limited reaction to that data point may reflect the “unequivocally negative” commentary by respondents to the ISM survey regarding the Middle East war and its economic consequences, said Priya Misra, portfolio manager at JPMorgan Asset Management.
“We think that the growth hit is inevitable and we are adding duration to portfolios on any rate backup,” Misra said.
Oil prices, meanwhile, have tracked sentiment shifts regarding the potential for an end to the Middle East war — started by US President Donald Trump on Feb. 28 — that has disrupted supply from the region. Session lows were reached after Trump late Tuesday said it could conclude within two to three weeks. He plans to address the nation at 9 p.m. in Washington.
Traders are pricing in about seven basis points of Fed easing by year-end, in a sharp contrast the week-ago consensus that tilted toward a hike.
“In the last few days there has been optimism about the ending of hostilities and rates have declined a bit as risk assets have cheered,” Misra said. “However, some damage has already been done and there is a chance that the conflict drags on longer.”
The bond market is still smarting after last month’s selloff, when inflation risks triggered by surging oil prices drove US yields around 40 basis points higher. As a result, a Bloomberg gauge of US government bond returns lost 1.7% in March, the biggest monthly decline since late 2024.
With assistance from Ruth Carson, Masaki Kondo and Naomi Tajitsu.
This article was generated from an automated news agency feed without modifications to text.
