(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
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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.
