Bond traders are now fully pricing in two rate cuts by the Federal Reserve this year after fresh data on producer prices and weekly jobless claims gave US Treasury markets a lift.
On Thursday, Treasury prices climbed sharply across nearly all parts of the curve, pushing yields down six to seven basis points. This marks their most significant one-day fall in a week, according to Bloomberg.
The drop erased almost all of the earlier rise sparked by stronger-than-expected May employment figures. As a result, the yield expected at a 30-year bond auction later in the afternoon fell to about 4.84%, versus roughly 4.98% at its peak earlier this week.
“The inflation data have been very, very good for the last four months,” said Tony Farren, managing director of rates sales and trading at Mischler Financial Group. “How many months of tame inflation data can the Fed ignore?”
Yields were already on the retreat before the Labor Department released its May producer price index and unemployment claims figures at 8:30 a.m. in New York. Traders had begun trimming expectations for Fed policy moves amid signs of cooling price pressures.
According to a Reuters report, US producer prices rose 2.6% in May compared with a year earlier, up from a 2.5% gain in April. The small increase suggested that inflation is slowing down more than most people expected.
European bonds up, oil down as traders bet on two Fed rate cuts
On Thursday, European bond markets, especially UK government bonds, rose, and oil prices gave up about half of Wednesday’s jump. That helped power the US rally and pushed yields even lower.
By day’s end, traders betting on interest rates were fully expecting two-quarter-point rate cuts to the Fed’s main rate by the end of 2025. Those odds had fallen after the strong June 6 jobs report but bounced back once Wednesday’s inflation data came in below forecasts.
Economists at Pantheon Macroeconomics noted that tariffs imposed under the Trump administration could push up inflation later in the year. Still, they wrote, “the near-term trend remains favorable, enabling the Fed to signal next week that it still intends to begin easing policy again later this year.”
Treasury to sell 30-year bonds for the first time since May high
The Federal Open Market Committee meets next week for its fourth gathering of 2025. Policymakers are expected to keep the benchmark short-term rate at its current 4.25%–4.50 % range, where it has stood since December. When they were expecting two quarter-point rate cuts by year-end.
In the wake of the strong jobs figures, some had speculated that those projections might be scaled back to a single cut. Now, most Wall Street economists expect no action until a quarter-point reduction in December.
At 1 p.m. in New York on Thursday, the Treasury will auction 30-year bonds for the first time since the yield on that maturity hit 5.15% on May 22. That peak followed Moody’s decision on May 16 to strip the US of its top credit rating, citing deteriorating fiscal metrics.
“Americans, especially recent graduates, are worried about how hard it is to find a job,” said Heather Long, chief economist at Navy Federal Credit Union. “If layoffs worsen this summer, it will heighten fears of a recession and consumer spending pullback.”
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