The Treasury market rallied after an auction of 10-year notes drew strong demand, easing concerns that investors will balk at financing swelling US deficits.
Treasuries gained across maturities, snapping five days of losses and pushing the 10-year yield about six basis points lower to 4.34%. The debt extended gains following a smooth $39 billion auction Wednesday.
“There’s been a little bit of a sigh of relief that it’s been very well-received in the market,” Nisha Patel, a fixed-income portfolio manager at Parametric Portfolio Associates, told Bloomberg Television.
Yields had been climbing over the past week after strong employment data curbed expectations for Federal Reserve interest-rate cuts and US legislation was passed that extends tax cuts.
Minutes from the June Federal Open Market Committee showed an emerging divide among Fed officials over the outlook for interest rates, driven largely by differing expectations for how tariffs might affect inflation.
“It isn’t all that surprising that the market managed to bounce after selling off for five consecutive sessions,” wrote Ian Lyngen, head of US rates strategy at BMO Capital Markets. “The solid takedown of the 10-year auction only added to the buying interest.”
The auction drew a yield of 4.362%, slightly lower than indicated by pre-auction trading just before the bidding deadline, indicating demand exceeded expectations. A $22 billion sale of 30-year bonds is set for Thursday.
Shorter-maturity yields also declined, with the two-year note’s dropping by three basis points, supported by strong demand for August federal funds futures.
Despite the June jobs data, anticipation of Fed rate cuts has been building amid constant pressure on the central bank from President Donald Trump, who has said Chair Jerome Powell will be replaced when his term ends by someone who’ll do his bidding. Trump on Wednesday said the US policy rate was at least three percentage points too high.
Higher borrowing
Higher borrowing costs have been a global phenomenon amid heightened sensitivity to fiscal concerns. Japanese bond yields surged this week on fears politicians will promise to loosen the purse strings as they court voters ahead of elections.
In the US, investors have focused on the fiscal implications of Trump’s tax law, which will add $3.4 trillion to the national debt over a decade, according to the non-partisan Congressional Budget Office.
Still, bond market reaction would likely constrain any further “maximalist” budget plans, according to BlackRock Inc., which cited the violent selloff in Treasuries on April 9.
“If there’s any sign that this is a very quick resetting, and we’re in a world where we have a 5% 10-year yield quickly on a sustained basis, the whole budget arithmetic — that is already pretty challenged — is out of the window,” Jean Boivin, head of the BlackRock Investment Institute, said in an interview on Bloomberg TV.
Uncertainty surrounding US trade policy is meanwhile evident in inflation metrics, with Trump expected to announce more details as he pushes forward with his aggressive tariff plan.
Rates swaps imply the central bank will keep rates in a range of 4.25% to 4.5% at its meeting later this month but deliver two quarter-point reductions by the end of 2025.
In the minutes released Wednesday, policymakers pointed to “considerable uncertainty” about the timing, size and duration of the tariffs’ potential effects on inflation.
An analysis by strategists at Deutsche Bank AG shows this is the fourth year running where markets have bet on a more dovish path for US interest rates than what transpired.
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