Jerome Powell
(Bloomberg) — Treasuries gained for the first time in five sessions after Federal Reserve Chair Jerome Powell reiterated his view that policymakers face a “challenging situation” in balancing risks to inflation and the labor market.
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The gains pushed yields two to four basis points lower across tenors, with the rate on the 10-year bond falling to 4.11%. The market had been under pressure since Powell last week suggested policymakers would take a cautious approach to further rate cuts.
In another sign of demand on Tuesday, a $69 billion auction of two-year notes drew solid demand. The Treasury is set to sell $114 billion worth of five- and seven-year securities on Wednesday and Thursday, respectively.
The Fed chair used a speech on the economy on Tuesday to warn there is “no risk-free path” as officials attempt to balance inflation that is running persistently above the Fed’s target with signs that the labor market is weakening.
Investors were looking for greater clarity from the slate of Fed officials speaking on Tuesday, culminating with Powell, who delivered prepared remarks before taking questions at an event in Rhode Island.
Powell “reiterated most of his comments from his FOMC press conference,” said Paresh Upadhyaya, Pioneer Investments director of Fixed Income and Currency Strategy. “The fixed income and FX markets thought the same, which is why there was little reaction to his comments.”
The dollar was little changed by Tuesday afternoon in New York.
Uncertainty around the path forward on interest rates has been high and investors have been leaning into bets that are likely to pay off even if rate cuts get knocked off course by surprising turns in the economy.
That has been reflected in options trades linked to the Secured Overnight Financing Rate, where traders are wagering on a wide array of policy outcomes.
In the aftermath of last week’s policy meeting, some have targeted fewer rate cuts than currently priced in the market. In the lead-up to the FOMC, however, there were a number of trades that would pay off if policymakers decide to cut rates by at least 50 basis points at one of the two remaining meetings this year.
Interest-rate swaps suggest borrowing costs will come down by 43 basis points by the end of the year. Last week, the FOMC reduced the policy rate to a range of 4% to 4.25% in its first cut of the year.
On Tuesday, Fed Governor Michelle Bowman urged policymakers to act decisively to bring down rates to support the sagging labor market.
Austan Goolsbee, meanwhile, urged caution, given inflation remains persistently above the Fed’s target. The Fed Bank of Chicago president said, “we need to be a little careful with getting overly upfront aggressive.”
What Bloomberg Strategists say…
“Federal Reserve Governor Michelle Bowman’s comments about the Fed at risk of getting behind the curve on the economy may eventually overshadow Chair Jerome Powell, who stuck to a well-rehearsed script. While Fedspeak left Treasuries and future fed funds pricing largely unchanged, it points to the potential for greater bond volatility on economic data, like the coming jobs report, and to a 10-year back at 4%.”
—Edward Harrison, Macro Strategist, Markets Live
For the full analysis, click here.
Fed’s Alberto Musalem on Monday said he saw limited room for more cuts. Newly appointed member Stephen Miran, however, said policy remains too tight in his first speech since being appointed to the central bank by President Donald Trump.
Focus now turns to the release of data on gross domestic product and personal consumption expenditures — often called the Fed’s preferred inflation gauge — later in the week.
“Jobs are slowing and more importantly the neutral rate is much lower than the rate we have today,” Bruce Richards, chief investment officer at Marathon Asset Management, said in an interview on Bloomberg TV, adding that he expects 125 basis points of additional rate cuts. “They have a lot more to go.”
–With assistance from Liz Capo McCormick and Anya Andrianova.
(Updates prices.)
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