As economic data shows a weakening in economic activity and a cooling in inflation, it supports the expectation that the Federal Reserve will implement two rate cuts this year, leading to an increase in US Treasury bond prices.
US Treasury bonds have risen, as the latest batch of economic data shows a weakening in economic activity and a cooling in inflation, which supports expectations that the Federal Reserve will cut interest rates twice this year. The bond rally on Thursday pushed yields on two-year to ten-year Treasuries down by 10 basis points or more.
After several large trades, yields on longer-term Treasuries also fell back from near 5%. Swap contract traders expect interest rates to be cut by about 55 basis points for the remainder of 2025. The dollar has fallen.
Wall Street strategists, including JPMorgan, raised their yield forecasts this week, as these firms delayed expectations about when the Federal Reserve would restore accommodative policies.
Zachary Griffiths, head of investment-grade and macroeconomic strategy at CreditSights Inc., stated, "Bad news is good news for the bond market," as Thursday's data—including producer prices and retail sales—pointed to economic weakness.
In April, prices paid by US producers unexpectedly fell, marking the largest decline in five years, indicating that companies are digesting some of the impacts from the tariffs. Meanwhile, US retail sales have noticeably slowed down as consumers cut back on spending for imported goods due to concerns over rising prices caused by the tariffs.
The yield on the two-year Treasury bond, which is most sensitive to Federal Reserve policy, fell by 10 basis points to 3.95%, while the benchmark 10-year Treasury yield dropped by about 10 basis points to 4.43%. Due to concerns about the fiscal trajectory in the USA, investors are becoming increasingly cautious about purchasing long-term securities, with the decline in the 30-year Treasury yield being slightly smaller.
Although swap contract traders have fully absorbed the expectation of a rate cut by the Federal Reserve in October, the market also has high expectations for a rate cut in September. This is earlier than some Wall Street economists had anticipated, as they postponed their forecasts for the next rate cut after the recent easing of US-China trade tensions.
The interest rate strategy teams from TD Securities, JPMorgan, and Bank of America recently raised their forecasts for US Treasury yields.
Meanwhile, a large-scale tax cut proposal by Republican lawmakers has been advancing, sparking new concerns about the fiscal trajectory in the USA, as the plan is expected to worsen the federal deficit and increase the government's debt burden.
JPMorgan CEO Jamie Dimon stated during an interview on Thursday that the deficit and debt burden in the USA are a problem.
Dimon mentioned at JPMorgan's annual global markets conference in Paris, "In my view, this will lead to inflation risks and the risk of rising long-term rates." He added that this could slow growth and create a stagflation scenario.
Given that the USA's debt management institution has increased the issuance of Treasury bills in recent years, rising short-term yields could hit the fiscal outlook. According to the Peterson Foundation, at least $9.3 trillion of federal debt will mature and roll over within a year—additionally, the US Treasury will need to issue about $2 trillion next year to cover the federal deficit.
Traders received signals from Federal Reserve policymakers this week, feeling reassured about keeping interest rates unchanged while awaiting clearer information on how government trade policies will impact economic growth and inflation. Last week, the Federal Reserve chose to keep rates stable while waiting for further evidence regarding the strength of the economy.
Cumberland Advisors' Chief US Economist David Berson stated, "If these trends continue, weak consumer spending and declining inflation may provide some room for the Federal Reserve to ease policies later this year."
Federal Reserve Chairman Powell did not provide insights on the recent outlook for monetary policy in his prepared remarks about the Federal Reserve's framework assessment on Thursday.
