An array of forthcoming economic reports and testimonies from Federal Reserve Chairman Jerome Powell could potentially disrupt the narrow trading range of US government bonds. Yields on the benchmark US 10-year Treasuries, which are inversely related to bond prices, have fluctuated between approximately 4.20 percent and 4.35 percent since mid-June, as the market processed data indicating a slowdown in inflation and signs of cooling economic growth in certain indicators. The 10-year yield was at 4.33 percent on Friday. Thus far, the economic figures have not been sufficient to alleviate concerns about the extent of interest rate cuts the Fed might implement this year, maintaining Treasury yields within a confined range. However, next week's US employment data, followed by inflation figures and Powell's testimony, could alter this perspective.
"The market has adopted a narrative that we might experience gradual softening but not a growth scare," commented Garrett Melson, a portfolio strategist at Natixis Investment Managers Solutions. "This will continue to keep us within this range, but the one factor that could significantly lower it is an increase in the unemployment rate." US monthly inflation, as measured by the personal consumption expenditures (PCE) price index, remained stable in May, according to a report released on Friday, reinforcing the narrative of decelerating inflation and resilient growth that has subdued bond market fluctuations and supported stocks in recent weeks. However, futures tied to the fed funds rate indicated traders were anticipating slightly less than 50 basis points of rate cuts for the year. Market reactions to the employment data, scheduled for next Friday, could be intensified by low liquidity during a week when many US bond traders will be on vacation for the July 4th US Independence Day holiday, noted Hugh Nickola, head of fixed income at GenTrust.
"The market is waiting for the other shoe to drop." A recent survey by BofA Global Research revealed that fund managers were the most underweight bonds since November 2022. Some believe this implies yields could decline further if weakening data strengthens the argument for additional rate cuts and encourages increased allocations to fixed income. Other key events for the month include consumer price data slated for July 11. Powell is set to deliver his semiannual testimony on monetary policy on July 9 at the Senate Banking Committee, according to the office of its chairman, Senator Sherrod Brown, on Monday. If tradition persists, the Fed Chair will present the same testimony at the House Financial Services Committee the following day. Some investors are not convinced that Treasury yields have much room to fall. Despite its recent cooling, inflation has been more persistent than anticipated this year, compelling the Fed to temper expectations regarding the aggressiveness of its rate cuts. An unexpected inflationary rebound in Australia highlighted the challenges some central banks face in controlling consumer prices.
Simultaneously, some investors believe that inflation is unlikely to revert to pre-pandemic levels and the US economy is likely to exhibit a higher degree of underlying strength, restricting the longer-term downside for bond yields, explained Thierry Wizman, global FX and rates strategist at Macquarie Group. "The market has become much more accustomed to the idea that when the Fed cuts rates, they won't cut by as much as people speculated a few months ago," Wizman stated. "People have adjusted their expectations but there's a limit to how much yields can fall based on one month of poor data."
