Long-term Treasuries fell, lifting the 30-year bond’s yield to the highest level since early September, as the implications of this week’s Federal Reserve interest-rate cut and policy stance filtered into the market.
The 30-year bond’s yield rose as much as six basis points to 4.86%, the highest level since September 5, and is about five basis points higher on the week. The two-year note’s yield, little changed Friday, is slightly lower on the week after sliding nearly eight basis points on Wednesday, when the Fed cut interest rates by a quarter point as expected.
What wasn’t expected was commentary by Fed Chair Jerome Powell, in the press conference following the decision, leaving the door open to additional rate cuts before his term ends in May. Economists at Bank of America called it “an unintentionally dovish cut”.
The prospect of more Fed rate cuts next year supports lower short-term Treasury yields, while long-maturity tenors reflect still-elevated inflation. Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeff Schmid, in statements released Friday, said inflation concerns drove their dissents from Wednesday’s rate cut in favour of no action.
“Chicago Fed President Austan Goolsbee said his recent rate-cut dissent was predicated on worries about inflation. Given traders are still pricing in two 25-bp cuts through the end of 2026, his comments point to downside risks for Treasuries,” says Edward Harrison, macro strategist, Markets Live at Bloomberg.
Also, Cleveland Fed President Beth Hammack, who next year rotates into the subset of regional Fed presidents who vote on rate moves, reiterated her view that inflation warrants forestalling rate cuts.
“They’re cutting into a pretty strong economy,” and “some fears of resurgence of inflation” during the second half of next year may emerge, to the detriment of long-duration assets, said Neil Sutherland, portfolio manager at Schroder Investment Management.
At the same time, a 30-year bond auction on Thursday, though well received, remains a possible source of upward pressure on yields to entice buyers. December 30-year bond auctions, however, have a good track record of rallying between the auction, which took place at 1 pm New York time Thursday, and 3 pm the next day, according to Tony Farren, managing director in rates sales and trading at Mischler Financial Group.
Meanwhile, expectations for lower Fed rates were supported by expectations that Powell’s successor will seek more aggressive easing at the urging of US President Donald Trump, broadly lower oil prices that may lessen inflation pressures, and separate Fed actions taken this week in support of lower money-market interest rates.
Philadelphia Fed President Anna Paulson, who also votes on rate decisions next year, speaking yesterday, said she was more concerned about labour market weakness than about upside inflation risks.
The divergent performance of short- and long-maturity Treasuries wedged their yields further apart, with key differentials reaching notable levels. For example, the gap between two- and 10-year yields nearly reached 65 basis points, last seen in April. The 30-year yield exceeded the five-year by 110 basis points, near the high end of its range since early September