(Bloomberg) — Treasuries rose on Friday and were on pace for a small weekly gain after survey data showed signs of a cooling U.S. economy.
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Yields were lower by at least two basis points, with short maturities down almost four basis points. Session lows were reached after an unexpected drop in S&P Global services gauge activity and a downward revision to the University of Michigan's sentiment gauge, both for January. The rally left Treasury yields slightly lower than the week, which began with the inauguration of Donald Trump to a second non-consecutive presidential term.
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The data backs up the view that the Federal Reserve – which meets on January 28-29 – will cut interest rates at least once this year as early as June, after reductions at each of its last three meetings . Bonds also benefited from Trump's lack of immediate action to impose tariffs on imports, although he has said he plans to.
“With a data-dependent Fed, the market is too focused on every economic statement,” said Christian Hoffmann, portfolio manager at Thornburg Investment Management. At the same time, “politics will continue to be the main driver of volatility and uncertainty.”
Money markets and economists surveyed by Bloomberg unanimously expect Fed Chairman Jerome Powell and his colleagues to maintain their target range of 4.25%-4.5% for the US overnight interest rate next week. Looking further into the future, rate swaps now favor two-quarter point declines by the end of the year. A week ago, only one was predicted.
Bonds began selling in September, pushing 10-year yields to a 14-month high of 4.8% earlier this month, reflecting concerns that trade protectionism could lead to inflation. Benign inflation data for December was released on January 15 and Fed Governor Christopher Waller commented the following day that a rate cut by mid-year was possible to stop the bleeding.
Short-term Treasury yields, which are more sensitive than longer-term ones to rate changes by the Fed, have moved the most this week. The 10-year yield is 36 basis points higher than the two-year, compared with 34 basis points a week ago. Open interest data for Treasury futures suggests investors are anticipating a steepening of the curve.