Economic Cooling Signals Boost Treasuries
The US economy is showing signs of slowing down, and investors are taking notice. According to recent survey data, the economy is cooling, leading to a rise in Treasuries and a potential small weekly gain.
Services Activity Takes a Hit
S&P Global’s gauge of services activity unexpectedly dropped in January, causing yields to fall by at least two basis points. Short-term maturities were hit the hardest, down nearly four basis points. This decline comes on the heels of a downward revision to the University of Michigan’s sentiment gauge, also for January.
Federal Reserve’s Next Move
The data suggests that the Federal Reserve, which meets on January 28-29, may cut interest rates at least once this year, potentially as early as June. This would mark the fourth consecutive rate cut. The lack of immediate action by President Trump to impose tariffs on imports has also contributed to the rally.
Market Volatility Ahead
According to Christian Hoffmann, portfolio manager at Thornburg Investment Management, “With a data-dependent Fed, the market is hyper-focused on every economic release.” However, politics will continue to play a significant role in driving volatility and uncertainty.
Interest Rate Expectations
Money markets and economists surveyed by Bloomberg expect the Federal Reserve to maintain its 4.25%-4.5% target range for the US overnight interest rate next week. Looking ahead, rate swaps now favor two quarter-point reductions by year-end, up from just one anticipated a week ago.
Bond Market Shift
Bonds began selling off in September, pushing 10-year yields to a 14-month high of 4.8% earlier this month. However, benign inflation data for December and Fed Governor Christopher Waller’s comments on a potential rate cut by mid-year have stopped the bleeding. Short-term Treasury yields have moved the most this week, reflecting their sensitivity to rate changes by the Fed.
Curve Steepening Ahead
Open-interest data for Treasury futures suggests that investors anticipate further steepening of the curve. The 10-year yield is now 36 basis points higher than the two-year, up from 34 basis points a week ago. As the economy continues to cool, investors will be closely watching the Federal Reserve’s next move.
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