NEW YORK (Reuters) - A series of important economic reports and Congressional testimony from Federal Reserve Chairman Jerome Powell could soon stir U.S. government bonds out of their recent stagnation.
Yields on benchmark U.S. 10-year Treasuries, which move inversely to bond prices, have been fluctuating between 4.20% and 4.35% since mid-June. This range reflects the market's reaction to data showing both slowing inflation and hints of cooling economic growth. As of Friday, the 10-year yield stood at 4.33%.
The current economic data hasn’t clarified how much the Federal Reserve might cut interest rates this year, keeping Treasury yields within a narrow range. However, next week’s U.S. employment data, inflation numbers, and Powell's testimony could alter this outlook.
Garrett Melson, a portfolio strategist at Natixis Investment Managers Solutions, commented, “The market expects some softening but not a major growth scare. This keeps yields in their current range, but a significant rise in unemployment could push them lower.”
A report released on Friday showed that U.S. monthly inflation, measured by the personal consumption expenditures (PCE) price index, remained unchanged in May. This has reinforced the narrative of slowing inflation and steady growth, which has stabilized the bond market and lifted stocks recently. Despite this, futures linked to the fed funds rate indicate that traders are expecting just under 50 basis points of rate cuts this year.
Next week’s employment data could trigger stronger market reactions due to low trading volumes during the July 4th holiday week, noted Hugh Nickola, head of fixed income at GenTrust. He said, "The market is waiting for the next big development."
A recent BofA Global Research survey showed fund managers are the most underweight in bonds since November 2022. This could mean that if data weakens further, reinforcing the case for rate cuts, there could be a significant shift towards bonds, driving yields down.
Other key events this month include consumer price data on July 11 and Powell’s semiannual monetary policy testimony on July 9 before the Senate Banking Committee, followed by a similar testimony at the House Financial Services Committee.
Despite recent cooling, some investors remain skeptical about significant drops in Treasury yields. Inflation has been more persistent than expected this year, causing the Fed to temper expectations for aggressive rate cuts. A recent surprise inflation rebound in Australia highlighted the ongoing challenge for central banks in controlling consumer prices.
Thierry Wizman, global FX and rates strategist at Macquarie Group, explained, "The market has adjusted to the idea that the Fed won't cut rates as much as previously thought. There's a limit to how much yields can drop based on one month of poor data."
source : investing.com