(Bloomberg) — Treasuries fell for a second day as fresh data showing resilience in the US labor market gave traders pause about the Federal Reserve’s path on interest-rate cuts
Yields settled about three basis points higher across most tenors, led by shorter-dated debt, which is more sensitive to changes in monetary policy. And interest-rate swaps showed traders slightly pared bets on Fed rate cuts. They are now pricing in 42 basis points of reductions by the end of the year, with the first full cut coming by the October meeting.
“The bottom line is that the Fed can’t credibly cut rates with an unemployment rate of 4.1%,” said George Catrambone, head of fixed income, DWS Americas. “There is a glass ceiling on how high yields can push out of their current range with a Fed that’s frozen in place.”
Data released Thursday showed initial claims for unemployment benefits fell to 217,000 in the week ended July 19, the lowest since mid-April.
Another pressure point for traders is a dispute between President Donald Trump and Federal Reserve Chair Jerome Powell over construction works, which the president has criticized for cost overruns.
Trump on Thursday toured the central bank’s headquarters, where a $2.5 billion renovation is ongoing.
“We would be helped if interest rates would come down,” Trump told reporters, standing next to Powell. “But we’re going to see how the board rules on that soon. I’d love to see them come down a lot.”
Traders have ruled out a rate cut at the Fed’s meeting next week.
“The mounting risk of the Fed being seen as acting more on a political than a fundamental level is a sizable threat to long-end rates over the medium term,” Rabobank strategists wrote in a note.
What Bloomberg Strategists say…
“This period of quiet in rates may prove transitory given the risks on the horizon. Traders appear content to wait for Fed Day, GDP and payrolls next week to deliver a directional cue, but the setup argues for a potential repricing. Since 2023, each period of consolidation in 2s10s has been followed by a robust steepening of the curve”
– Brendan Fagan, Macro Strategist, Markets Live
For the full analysis, click here.
With Fed speakers in a blackout period ahead of that meeting, bond investors were largely focused on the weekly jobless claims report. The six weeks of declines is the longest such stretch since 2022.
“The labor market deterioration has slowed or stopped, with the caveat the labor supply, immigration, negative data revisions are making reading the labor market data tricky,” said Ed Al-Hussainy, rates strategist at Columbia Threadneedle Investment.
Market expectations of rate cuts starting from late September, “may be off the table if unemployment is unchanged next week,” he said.
European government bonds also fell after the European Central Bank tempered expectations of a possible interest rate cut in September.
Investors were already turning broadly more risk-on amid deals between the US and its trading partners. The European Union and the US are progressing toward an agreement that would set a 15% tariff for most imports, according to diplomats briefed on the negotiations.
Earlier on Thursday, a $21 billion auction of 10-year Treasury Inflation-Protected Securities drew solid demand.
–With assistance from Naomi Tajitsu.
(Updates prices in second paragraph, adds Bloomberg strategist quote and details on Trump tour.)
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