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Treasury Yields Drop to Lowest Level in Two Months Before Powell Speaks - BLOOMBERG
(Bloomberg) -- Treasuries fell on Tuesday after a report on US job openings failed to provide justification for a Federal Reserve interest-rate cut as soon as next month.
Bonds slipped across maturities with yields trading close to session highs late in New York. Shorter-dated tenors, those more sensitive to Fed policy shifts, rose the most. The two-year note’s yield was up about six basis points to 3.78% — rebounding from below 3.70% earlier in the session — following JOLTS data that showed a steep increase in openings, a sign of strength in the labor market.
The market had been rallying in anticipation that three reports on the employment picture would spur Fed rate cuts. Traders saw a remote chance of the first of those coming in July if the reports showed weakness in the labor market. Fed Chair Jerome Powell, speaking at a global monetary policy event in Sintra, Portugal, declined to rule out a July cut.
“It seems as if the market has bypassed the data-dependency” of Powell “and focused more on the much stronger May JOLTs data,” said John Brady, managing director at RJ O’Brien.
Momentum has been building in favor of earlier Fed rate cuts despite expectations that tariffs introduced by the US administration this year will contribute to faster inflation. President Donald Trump on Tuesday said he’s not considering delaying the July 9 deadline for those levies.
A July rate cut is viewed as a long shot, but swap contracts linked to Fed policy shifts assign it about 15% odds versus near zero last month, and in the past week, interest-rate options trades looking for lower yields and a faster pace of Fed easing have been popular. A quarter-point cut is fully priced in for September.
Economists at Goldman Sachs Group Inc. on Monday predicted Fed rate cuts in September, October and December. They previously expected one, in December.
Related story: Goldman Sachs Pulls Forward Fed Rate-Cut Forecast to September
Against the backdrop of record highs for US stocks and other favorable financial conditions, Fed policymakers may insist on evidence of a faltering job market before cutting rates. Two other reports this week — the ADP report on private-sector job creation and the US Labor Department’s employment report, both for June — could still provide it.
“If the jobs data finally confirm the concerns on the labor front, it gets the Fed off the fence, to at least start to signal that July is a possibility,” said George Goncalves, head of US macro strategy at MUFG Securities Americas Inc. “You’ll get more Fed speakers leaning toward a cut in July. Investors don’t want to miss that pivot. But it’s all predicated on a weak NFP,” he said, referring to the employment report’s nonfarm payrolls component.
The Treasury market delivered its best performance since February last month as softer-than-expected inflation data and growth in jobless claims drove expectations for an earlier start to Fed rate cuts. Traders are pricing in around 65 basis points of cuts by year-end, compared with around 50 basis points at the end of May.
Speaking in Sintra, Powell — who has said that widespread expectations for tariff-induced inflation to emerge later this year mean that the Fed should be cautious — reiterated that message in part.
He said Fed officials would “expect to see over the summer some higher [inflation] readings, but we’re prepared to learn that it can be higher or lower or later or sooner than we’d expected.”
Policy will evolve “meeting by meeting,” he said, “but I wouldn’t take any meeting off the table or put it directly on the table. It’s going to depend on how the how the data evolve.”
Powell’s comments came as the US administration steps up its criticism of the Fed as being too slow to reduce borrowing costs.
Trump sent a note to Powell on Monday with a list of interest rates in other countries, calling for cuts in the US, White House Press Secretary Karoline Leavitt said. Meanwhile, Treasury Secretary Scott Bessent told Bloomberg TV that policymakers “seem a little frozen at the wheel” with regard to deciding on rates right now.
“Powell has been fairly balanced, but I think he just announced what is coming down the road, and that is a rate cut and possibly more than expected,” Tom di Galoma, managing director at Mischler Financial Group, said.
Trump’s announced intention to replace Powell when his term ends in May 2026 with a Fed chair who’ll cut rates has helped drive short-term Treasury yields lower.
Also in focus is the latest US budget deal that may alter expectations for deficits and borrowing. On Tuesday, the US Senate passed a $3.3 trillion tax and spending cut bill and the package, which now goes to the House, combines $4.5 trillion in tax cuts with $1.2 trillion in spending cuts.
(Updates prices starting in second paragraph; adds Senate passing budget deal.)
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