US Bonds Lead Global Selloff as Sticky Prices Weigh on Fed Path

(Bloomberg) — Treasury yields rose to 2024 highs as evidence of sticky US price pressures casts doubt on the Federal Reserve’s ability to start lowering interest rates later this year. Global bonds echoed the selloff.

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Another key inflation report lies ahead on Friday, with the potential to further erode expectations for even a single rate cut this year. Even so, demand was fair-to-strong for this week’s more-than-$180 billion worth of Treasury auctions, a sign that investors remain inclined to treat yield surges as buying opportunities.

“A lot of macro news is now embedded into the yield curve,” said George Goncalves, head of US macro strategy at MUFG. Ahead of Friday’s inflation reading, followed by the Treasury’s refunding announcement and the Fed’s meeting next week, solid auction demand “shows the market is efficient and not looking to overpay for US Treasuries yet,” he said.

Read More: US Yields Soar as Traders See Fed Delaying First Cut to December

US 10-year Treasury yields advanced as much as nine basis points to 4.74% on Thursday before steadying on Friday. The move spread to Asia with Australian, New Zealand and Japanese bonds tumbling.

Economic data earlier on Thursday was the latest to force Wall Street to temper its expectations for lower borrowing costs in the world’s top economy. Gross domestic product increased at a 1.6% annualized rate last quarter, while a closely watched measure of underlying inflation advanced at a greater-than-expected 3.7% clip.

As a result, traders pared back expectations for the timing of a Fed rate reduction, fully pricing in the first cut in December. They now see only about 33 basis points of Fed rate reductions for all of 2024, well below the more than six quarter-point reductions they expected at the start of the year.

“Inflation is going to end the year between 2.5% and 3.5%,” said Sinead Colton Grant, chief investment officer at BNY Mellon.

Treasury yields remained elevated through the trading session Thursday as traders looked ahead to more economic indicators on Friday. The personal consumption expenditures price index — the Fed’s preferred inflation measure — is projected to show the annual rate rose to 2.6% last month, from 2.5% in February. That would suggest progress toward the Fed’s 2% goal has stalled.

US policymakers will then convene next week and announce an updated policy statement. Attention will likely focus on any commentary from Chair Jerome Powell on recent data and the implications for the rate path ahead. In March, Fed officials laid out a forecast of three quarter-point cuts in 2024. Employment data at the end of next week will also offer more clarity about the economy.

To BNY’s Colton Grant, the “biggest danger” for investors is to focus on the number of rate cuts this year — and “lose sight of the big prize, which is the ability to add a better diversifier for your portfolio at a higher yield level.”

The yield on benchmark two-year Treasuries rose as high as 5.02% before buyers stepped in on Thursday. Yields above 4.70% in the 10-year also attracted buyers.

With yields elevated, the Treasury was able to sell $44 billion of seven-year notes in line with forecasts, capping a trio of auctions that flooded the market this week.

Overall, the Treasury’s sales were taken in by buyers without much fuss. An auction of two-year notes found solid demand that forced the yield below its bidding deadline, and the five-year later arrived only slightly soft.

The seven-year auction, meantime, was awarded at 4.716% yield, the same level indicated in pre-auction trading at the 1 p.m. New York time bidding deadline — an indication that demand met dealer expectations. Bond dealers underwriting the seven-year auction were left with just 13.9% of the paper, below the recent average of 15.1%, according to BMO Capital Markets.

–With assistance from Liz Capo McCormick and Elizabeth Stanton.

(Adds global bonds moves.)