US Treasuries rallied after a strong note auction and data revealed the world’s top economy shrank at the start of the year, reinforcing bets the Federal Reserve will lower interest rates twice by early 2026.
US government debt extended gains Thursday after the Treasury Department received robust demand for a sale of new notes. Investors aggressively snapping up US debt for the third straight day helped quell concerns that a widespread “Sell America” sentiment would dampen note-auction results.
The advance pushed yields lower in the wake of the latest revisions of first-quarter gross domestic product — which showed growth was restrained by weaker consumer spending. Traders kept their wagers that the Fed will next cut rates in October, pricing in 55 basis points of easing by next January.
“What the bond market’s really going to be pegged off is the trajectory for what the impact of all of this uncertainty is going to be on growth,” said Subadra Rajappa, head of US rates strategy at Societe Generale. “The Fed is probably going to keep policy on hold for as long as they can. So two cuts that are priced in for this year makes sense.”
Even as White House officials downplayed the implications of the court ruling that blocked President Donald Trump’s sweeping levies, attention, quickly shifted toward the data. Continuing jobless claims, a proxy for the number of people receiving unemployment benefits, rose to the highest level since November 2021.
“Some of the details of this morning’s GDP release and the higher jobless claims figures have been a positive for Treasuries,” said John Canavan, analyst at Oxford Economics.
Yields on two-year Treasuries, the most sensitive to the Fed’s monetary policy, were lower by about five basis points to 3.94%. The 10-year rate fell five basis points to 4.42%. Meanwhile, the dollar weakened.
Meanwhile, Fed Chair Jerome Powell met with President Trump Thursday at the White House, the central bank said in a statement, their first such meeting since the president began his second term. Powell did not discuss the outlook for monetary policy, the Fed said. But the White House said Trump told the Fed chair he is making a mistake for not lowering interest rates.
Bond traders had gone into Thursday’s economic readings with the view that the $29 trillion Treasury market would decline further.
A JPMorgan Chase & Co. survey of traders released this week spotlighted that investors expect the selloff to worsen, keeping yields elevated. The survey’s all-client category for outright short positions — which includes central banks, sovereign wealth funds, real money and speculative traders — has climbed to the most since around mid-February.
What Bloomberg strategists say…
“The bond market has reacted quite strongly to these numbers— probably more strongly than they warrant in isolation. That probably says as much about positioning as it does this data.”
Cameron Crise, Markets Live blog strategist
Instead, the Treasury sold $44 billion of seven-year notes, at a yield of 4.194% — well below the 4.216% when-issued level the security traded at just before auction bidding completed. That, as well as a pick up in the bid-to-cover ratio and other metrics revealed strong demand for the notes.
“It was a solid 7-year auction,” said Peter Boockvar, chief investment officer at Bleakley Financial Group LLC. “Bottom line, Treasury yields are at the lows of the day in response.”
The sale capped a trio of auctions this week. The two- and five-year offerings were both met with solid demand, showcasing appetite for US debt despite recent weakness in global sales of longer-term bonds.
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