(Bloomberg) — Treasury bonds slumped and traders further trimmed their outlook on the pace of Federal Reserve rate cuts, deterred by signs of continued price pressure.
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Thursday’s selloff in U.S. Treasury bonds pushed yields across the curve to their highest levels of the year. Traders reduced their expectations for the timing of a Fed rate cut and are now fully pricing in the first rate cut in December.
While data showed growth for the quarter was weaker than most economists had predicted, hot underlying inflation numbers – and an unexpected drop in weekly jobless claims – again took precedence for bond traders. That sets the stage for a $44 billion auction of seven-year notes later on Thursday.
“Higher inflation and a strong labor market are overshadowing weaker consumption,” Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets, said in a note. “After these numbers, talk of stagflation will certainly gain momentum.”
Read more: The US economy is slowing and inflation is rising, dampening hopes of a soft landing
Thursday’s economic data is the latest to force Wall Street to temper its expectations for lower borrowing costs in the world’s largest economy. The US bond market is facing its fifth week of losses in a row.
Gross domestic product rose 1.6% on an annual basis in the latest quarter, while a closely watched measure of underlying inflation rose more than expected at 3.7%.
The yield on two-year benchmark government bonds rose to just over 5%. Yields across the maturity spectrum reached their highest level since November.
Swap traders now see only about 33 basis points of Fed rate cuts for all of 2024, significantly less than the more than six quarter-point cuts they had expected at the start of the year.
“The Fed has to buy time here. They are between a rock and a hard place,” Bob Doll, chief investment officer at Crossmark Global Investments, told Bloomberg Television on Thursday before the data was released.
Read more: High yields lure buyers as US sells $180 billion in Treasury bonds
Investors face another flood of Treasury bonds with the sale of seven-year notes later on Thursday. While demand for two- and five-year bond auctions has been strong over the past two days, there is less certainty about the next auction.
However, higher interest rates could spur interest as the expected yield at Thursday’s seven-year bond auction is closer to last year’s multi-year high. The auction returned about 4.72% in trading ahead of the sale, which ends at 1 p.m. New York time, up more than 7 basis points on the day.
– With assistance from Edward Bolingbroke and Elizabeth Stanton.
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