(Bloomberg) — Treasury yields rose, some hitting all-time highs, as investors grew increasingly doubtful that the U.S. economy will need as many interest rate cuts from the Federal Reserve this year as the market has priced in.
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While the only economic data released Friday was minimal revisions to the 2023 Consumer Price Index readings, the S&P 500 index hit a new record high led by growth stocks and Canadian jobs data for January topped economists' estimates, similar to the U.S -Labour market report a week ago.
Market-implied expectations for Fed rate cuts this year continued to ease, but continue to price in a quarter-point move in June and a total of four this year. Next week, consumer price data for January is expected to show another slowdown, which Fed officials say is a prerequisite for a move toward rate cuts after 11 rate hikes in the past two years.
“It's the economic data that's driving the market because if a soft landing is the consensus, then no landing” — or sustained growth rates — “will be the risk,” said Tracy Chen, portfolio manager at Brandywine Global Investment Management.
Two-, three- and five-year bond yields hit their highest level since Dec. 13, rising less than five basis points on the day. Longer-dated yields, which are less sensitive to changes in the Fed's key interest rate, rose less.
Canada's employment data reinforced an outlook that emerged based on U.S. indicators for January, including job creation and purchasing manager sentiment. An index of the trend of data releases relative to expectations, the Citi Economic Surprise Index, hit its highest level since November this week.
The story goes on
The Treasury market is under pressure because “people are worried about the data and worried about the impact on the start of the easing cycle,” Earl Davis, head of fixed income at BMO Asset Management, told Bloomberg Television on Friday.
Another factor driving Treasury yields was the expectation of a large number of new corporate bonds next week, which was concentrated on Monday ahead of the release of January CPI data on Tuesday.
Economists polled by Bloomberg expect annual U.S. inflation to fall to 2.9% in January from 3.4% the previous month, which would be the lowest level since the start of 2021.
Bonds briefly pared losses early Friday after revisions to last year's consumer price index reading included a slight downward revision to December's rise. The revisions kept the annualized core inflation rate for the fourth quarter unchanged at 3.3%, and revisions to the headline figure were minimal.
Bond traders are betting big on market calm as they wait for the Fed's move
UK inflation data for January will also be released next week.
“It is important to remember that both countries’ CPI numbers were above market expectations in December, showing that the path to the destination is unlikely to be linear,” Felipe Villarroel, portfolio manager at TwentyFour Asset Management, wrote in a note. “The markets, and certainly the Fed and BoE, don’t need another surprise next week.”
The selloff caused losses for those buying three auctions of Treasuries and Treasuries this week, all of which enjoyed strong demand, including a record 10-year auction worth $42 billion.
“I think it's a good buy level,” said Priya Misra, portfolio manager at JPMorgan Investment Management. “It is a matter of when, not if, when interest rate cuts occur, and in the last week the market has scaled back many of the priced-in cuts. In addition, government bonds should be a good hedge for risky assets. ”
– With assistance from James Hirai and Edward Bolingbroke.
(Adds comments, updates yield levels.)
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