(Bloomberg) — US Treasuries extended gains triggered by the Federal Reserve as markets took reassurance that policymakers are still on a path toward lower interest rates.
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The advance on Thursday pushed yields on 10-year notes lower by almost five basis points to 4.2%, while the two-year rate — the most sensitive to changes in monetary policy — dropped three basis points to 3.94%, after falling as much as seven basis points on Wednesday. Traders bet on around 68 basis points of rate reductions from the Fed by year-end, up from 57 basis points on Tuesday.
The message the Fed gave vindicated traders who had piled into the US bond market in recent weeks. Even as Chair Jerome Powell swatted away the recession worries that have shadowed Wall Street — fueling a stock market rally during his press conference Wednesday — investors also embraced short-term Treasuries as he highlighted the uncertainty behind the outlook.
The decision underscored the shift in the market’s focus “with greater emphasis now placed on the risks of weaker growth outcomes, rather than the inflationary concern,” said Dan Siluk, a portfolio manager at Janus Henderson. He called it “a slightly less-hawkish tone than many on Wall Street anticipated.”
Powell’s messages to the bond market were that US growth is likely to slow, any inflation pickup should be transitory, and interest rates will probably come down before the year is out. He also said that “uncertainty today is unusually elevated.”
The comments and forecasts came on the heels of a tumultuous few weeks in markets as investors re-calibrated their expectations amid growing speculation that President Donald Trump’s policies could slow the economy.
For bond investors, it was reason enough to seize on the fact that the central bank dialed back its growth forecasts for this year, validating some of the concern that a trade war and spending cuts will drag on growth.
That also supported speculation that the Fed will cut interest rates twice in 2025, as policymakers indicated with their latest projections. Officials’ expectations for reductions this year matched those in the bond market, where the first quarter-point cut is fully priced in for July.
“It was pretty masterful from Powell to be able to pull off preserving optionality once again,” said Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, on Bloomberg TV. The path forward for Fed policy may be clearer after April 2, when the White House is set to flesh out its trade policy, she added.
