Jobs, inflation data may push U.S. Treasury market out of tight range By Reuters

By David Randall

NEW YORK (Reuters) – A flurry of upcoming economic reports and congressional testimony from Federal Reserve Chairman Jerome Powell could push U.S. government bonds out of a tight trading range.

U.S. 10-year Treasury yields, which move inversely to bond prices, have hovered between 4.20% and 4.35% since mid-June as the market digested data showing slowing inflation and signs of cooling economic growth in some indicators. The 10-year yield stood at 4.33% on Friday.

Economic figures have so far failed to dispel doubts about how deeply the Fed will be able to cut interest rates this year, keeping Treasury yields within a limited range. But next week's U.S. jobs data, followed by inflation numbers and Powell's appearance could change that outlook.

“The market has adjusted to the idea that we can see gradual weakness, but not fear of growth,” said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions. “That will keep us in this range, but the only thing that will push it significantly lower is an increase in the unemployment rate.”

U.S. monthly inflation, as measured by the personal consumption expenditures (PCE) price index, remained unchanged in May, according to a report released Friday, reinforcing the idea of ​​a slowdown in inflation and a resilient growth that has moderated bond market swings and boosted stocks in recent weeks. However, futures linked to the federal funds rate showed traders pricing in just under 50 basis points of rate cuts for the year.

Market reactions to the jobs data, due next Friday, could be exacerbated by low liquidity during a week in which many US bond traders will be on vacation for the US Independence Day holiday on July 4, said 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 showed fund managers are the most underweight bonds since November 2022. Some believe that means yields could fall further if weaker data reinforces the case for further rate cuts and spurs higher allocations to fixed income.

Other highlights of the month include consumer price data scheduled for July 11. Powell is scheduled to give his semiannual testimony on monetary policy on July 9 to the Senate Banking Committee, the office of his chair, Sen. Sherrod Brown, said Monday. If tradition holds, the Federal Reserve chairman will give the same testimony before the House Financial Services committee the next day.

Some investors are not convinced that Treasury yields have to fall much further. Despite its recent cooling, inflation has proven more persistent than expected this year, forcing the Federal Reserve to rein in expectations about how aggressively it can cut rates. A recent unexpected inflation spike in Australia underscored how difficult it has been for some central banks to keep consumer prices under control.

At the same time, some investors believe inflation is unlikely to return to pre-pandemic levels and that the U.S. economy is likely to show a greater level of underlying strength, limiting the long-term downside in bond yields, said Thierry Wizman, global rates and currency strategist at Macquarie Group (OTC:).

“The market has become much more accustomed to the idea that when the Fed cuts rates, it won't do so to the extent that people assumed a few months ago,” Wizman said. “People have adjusted their expectations, but there is a limit to how much yields can fall in a month of bad data.”