By Alden Bentley
NEW YORK (Reuters) – Easier U.S. Treasury yields on Friday partly unwound the previous session’s surges as investors digested data showing a resilient U.S. consumer and inflation trending lower, leaving the Federal Reserve ample scope for a small rate cut next month.
Near panic sparked by a jump in the unemployment rate two weeks ago that the economy was heading for a recession rather than a soft landing briefly sent bond yields tumbling to levels not seen in more than a year as investors moved into the safety of Treasuries and jettisoned stocks.
But healthy retail sales data and a smaller than expected rise in weekly unemployment claims on Thursday, on the heels of benign producer and consumer price index readings earlier in the week, restored confidence in the economic picture, launching two-year and 10-year yields into their biggest rises in weeks.
Interest rate futures traders scaled back bet’s that the Fed would need to cut 50 basis points when it next meets in September.
Based on the fed funds futures term structure, they now see an 80% chance of a 25 bp ease in the policy rate, which has been in a 5.25%-5.5% target range since the Fed stopped hiking rates in July 2023.
Since there is no FOMC in August the market seeks a strong signal from chair Jerome Powell next Friday when he speaks at the Fed’s annual Jackson Hole symposium.
“Today is just a little bit of a pullback of yesterday’s oversized move. We kind of showed that you’re seeing cracks in unemployment but the underlying trend hasn’t really collapsed,” said Jan Nevruzi, U.S. rates strategist at TD Securities in New York.
“I think it will be harder for Powell to make the case that we need an outsized cut at next week’s Jackson Hole speech,” he said.
Weak July housing starts and building permits data kept pressure on yields, then yields rose slightly after the release of a stronger-than-expected preliminary August University of Michigan consumer sentiment survey reading of 67.8, up from July’s 66.4.
The yield on the benchmark U.S. 10-year note was off 2.8 bp at 3.898%, paring Thursday’s gain that was the biggest in a week.
The 2-year note yield, which typically moves in step with interest rate expectations, reached its highest since Aug. 2 on Thursday and was last down 2.6 bp at 4.0749%. It’s 15.9 bp rise the previous session was the biggest since April 10.
The 30-year bond yield fell 2.3 basis points to to 4.1565%.
The closely watched gap between yields on two- and 10-year Treasury notes, considered a gauge of growth expectations, was at negative 17.7 bp, barely steeper from late Thursday.
An inverted yield curve is generally seen as pointing to a recession. During the market freak out early last week, hopes of an aggressive September easing shifted the gap between 2- and 10-year yields to a positive 1.5 bps, the first time the curve had a more normal upward slope since July 2022.
(Editing by Nick Zieminski)
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