On Friday, U.S. Treasury yields retreated from multi-month highs as investors engaged in profit-taking following a week-long surge. The market had fully factored in the Federal Reserve’s shift towards a gradual easing path in monetary policy.
Yields on U.S. two-year notes decreased from a 2-1/2-month peak, while those on the three-year, five-year, and seven-year notes also declined from nearly three-month highs.
Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco, noted that the adjustment to the Fed’s less aggressive easing stance had already been priced in. Bargain hunters and short coverers stepped in as rates had become relatively cheaper after reaching multi-month highs.
The uptick in Treasury yields earlier in the week was partly driven by less dovish remarks from the Fed on Thursday and similar sentiments expressed by European Central Bank (ECB) officials on Friday. ECB President Christine Lagarde commented that although fourth-quarter wage growth data were relatively benign, they were not yet sufficient to instill confidence that inflationary pressures had been eradicated.
Echoing Lagarde’s stance, Joachim Nagel, a member of the ECB’s Governing Council, emphasized the importance of resisting premature interest rate cuts, suggesting a cautious approach to monetary policy adjustments.
The comments from European Central Bank (ECB) officials, which pushed euro zone yields higher, also had a spillover effect on U.S. Treasury yields.
Throughout the week, statements from Federal Reserve officials indicated that the central bank will proceed cautiously in lowering interest rates to ensure that inflation stabilizes at its target of 2% over the long term.
Consequently, expectations in the rate futures market have been adjusted, with forecasts now suggesting three rate cuts this year. The easing cycle might commence in June or later, according to LSEG’s rate probability app.
In late morning trading, the benchmark 10-year U.S. Treasury yield declined by 6.3 basis points (bps) to 4.263%, while the 30-year bond yield dropped by 7.6 bps to 4.386%. Both yields were poised to record their third consecutive weekly gains.
On the shorter end of the yield curve, two-year U.S. Treasury yields slipped by 2.4 bps to 4.689%. Earlier in the session, they had reached 4.59%, the highest level since December 11.
Investors are closely monitoring next week’s heavy supply of Treasury debt. The U.S. Treasury plans to auction $63 billion in two-year notes and $64 billion in five-year notes on Monday, both of which represent record volumes. Additionally, on Tuesday, the Treasury will auction $42 billion in seven-year notes.
Tom di Galoma, managing director and co-head of global rates trading at BTIG, remarked that the significant supply of Treasury bonds could pose challenges for the market to sustain lower yields. However, he expressed optimism about buying opportunities in the market on yield increases, anticipating a potential pivot by the Fed leading to lower rates in the future.