Treasuries rallied, led by 10-year yields dropping 10 basis points as traders boosted bets on Federal Reserve interest-rate cuts, with US President Donald Trump’s tariff plans weighing on risk appetite.
Yields on 10-year US bonds fell below 4.30%, the lowest level in over two months. Money markets implied more easing from the Fed, fully pricing two quarter-point reductions this year for the first time in four weeks.
The 10-year Treasury yield has set fresh year-to-date lows over the past week as investors grow more confident that the US economy is weakening and interest-rate reductions will resume, with uncertainty around the Trump administration’s policies weighing on business expectations. An auction of two-year notes drew strong demand on Monday, after data Friday showed the services sector contracted for the first time in two years in February.
“The 10-year will be sensitive to the data and if we do continue to see a little bit of a slowdown, then yields could grind lower,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “If the administration is going to cut spending and focus on initiatives that try and get the deficit down, then there is an element of austerity and of the economy slowing.”
The 10-year could drop towards a key technical level of 4.25%, it’s 200-day moving average, said Faranello. “If you look at this 10-year over the last four years, it’s been pretty true to these moving averages, so we can move into that 4.25% area,” and a break lower from there “could get potentially a little grabby.”
As the Treasury rally extended, flows early in New York saw aggressive buying in 10-year Treasury options that targeted a yield drop to around the 4.15% level by an April 25 expiry in 59 days’ time.
“Red flags are emerging for the US economy,” said Elias Haddad, senior market strategist at Brown Brothers Harriman. “Another month or two of poor US economic data would deliver a blow to the US exceptionalism narrative.”
Swaps are now pricing 54 basis points of easing from the Fed by the end of the year, compared to 48 basis points on Monday. The yield on two-year Treasuries fell five basis points to 4.12% as of 11:30 a.m. in London.
What Bloomberg strategists say...
“The narrative shifted on Monday, from ‘the new US administration isn’t yet delivering on our pro-growth expectations’ to ‘US policies may be starting to cause real economic damage.’ ... That’s why US 10-year yields are at their lowest level in more than two months and likely to head a chunk lower again over the coming weeks.”
— Mark Cudmore, MLIV Executive Editor, Singapore.
Attention turns to an auction of $70 billion five-year notes, alongside commentary from the Fed’s Vice Chair for Supervision Michael Barr on financial stability and the Fed’s Bank of Richmond President Tom Barkin on inflation.
The Fed’s Bank of Dallas President Lorie Logan, speaking in London on the future of the central bank’s balance sheet, said it would be appropriate in the medium term for the Fed to purchase more shorter-term securities than longer-term ones so that its portfolio can more quickly mirror the composition of Treasury issuance.
The US central bank is currently winding down its Treasury holdings and traders are on alert for any clues it’s set to pause or slow down its balance-sheet runoff, after minutes from last month’s Fed meeting revealed discussions on the matter. Logan did not comment about the timing of such a slowdown or pause in Tuesday’s remarks.
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