(Bloomberg) — The US Treasury market is heading for its best weekly gain this month as economic angst reinforces bets on interest-rate cuts.
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A Bloomberg gauge of US government debt is up 0.5% this week, bringing its return for the year to 2.7% — the best start since 2022. The latest leg follows the Federal Reserve’s March policy meeting, in which Chair Jerome Powell highlighted the uncertainty behind the outlook.
Traders are pricing in about 70 basis points of rate reductions by the end of the year, implying expectations for two quarter-point cuts in 2025. A third move is fully priced in by January 2026.
“The baseline is that inflation is transitory,” said Gang Hu, managing partner at Winshore Capital Partners. And “if the economy weakens, Powell’s not afraid of cutting rates. I won’t be surprised if they end up cutting three times this year.”
For bond investors who’d been piling into Treasuries over recent weeks, Wednesday’s Fed policy announcement offered vindication. Officials downgraded their expectations for growth and touted the cloudiness of the outlook, spurring demand for havens such as the dollar and Treasuries.
In the bond market, the advances pushed 10-year yields lower over the week by 10 basis points to 4.2%, approaching year-to-date lows. Open interest increased in 10-year note futures for a seventh straight session, consistent with traders taking on new long positions.
The move extended on Friday thanks to support from European debt, where shorter-dated bunds priced in higher odds of more rate reductions from the European Central Bank. The S&P 500 Index also ticked lower in early New York trading, fueling haven demand for bonds.
Treasury yields can fall further, according to Bloomberg Intelligence strategists led by Ira Jersey. The 10-year’s could move toward 4% if upcoming labor-market data is weak, they wrote in a note on Friday. A breach of 4% would mark the lowest level for 10-year yields since October.
Vishwanath Tirupattur, Morgan Stanley’s chief fixed income strategist, also expects 10-year yields of 4% by year-end and just one reduction in 2025, followed by more in 2026.
“As the weakness in hard data begins to manifest, the market will start to expect that there will be a lot more cuts needed in the year ahead,” he said on Bloomberg Television on Friday. “So the market will begin to price in more cuts.”
