Treasuries advanced at the close of the week as mixed economic data reinforced expectations the Federal Reserve will stay on hold, shifting the market’s focus back to inflation.
Friday’s gains pushed yields lower by two basis points across tenors, capping a week of swings driven by shifting expectations around the war in Iran. Benchmark 10-year yields closed at 4.36%, little changed from last Friday.
The data pointed to a resilient labour market, with payrolls rising by 115,000 in April and the unemployment rate holding at 4.3%. That raises the stakes for the release of consumer price data, which is expected to show inflation remains well above the Fed’s target.
"The higher headline and unchanged unemployment rate continues to leave the Fed’s focus on inflation,” said Molly Brooks, US rates strategist at TD Securities. "April CPI next week will be a key event to assess the market’s bias of the direction of the next Fed move.”
Money-market pricing suggests the Fed will keep rates steady for the rest of the year, with some hedging for a possible hike in 2027.
"This locks in the stalemate at the Fed and solidifies they are on hold here indefinitely,” said Michael Collins, portfolio manager at PGIM Fixed Income, on Bloomberg Television.
Friday’s dip in yields helped to erase a small rise this week that’s come amid uncertainty over efforts to reach a peace deal in the Middle East. The US and Iran clashed overnight near the Strait of Hormuz, an escalation that risks undermining talks to end the war. Iran has still given no indication whether it will accept US President Donald Trump’s proposal, which looks for Tehran to reopen the key waterway and the US to end a blockade on Iranian ports.
The conflict remains a major driver of the $31tn Treasuries market as the Strait’s closure chokes the flow of oil out of the region. Bond investors have been torn between growth and inflation risks posed by the surge in energy prices.
Also on Friday, the University of Michigan survey showed consumer sentiment fell in recent weeks to a fresh record low, while inflation expectations edged lower.
A Bloomberg gauge of the Treasury market’s returns has fallen 1.7% since Trump ordered an attack on Iran on Feb. 28. Before the war started, overnight index swaps had priced in more than two quarter-point rate Fed cuts this year — with some on Wall Street leaning toward more after Trump picked Kevin Warsh to take over as the next Fed chair.
But those expectations were subsequently erased, and traders now expect the Fed will stay on hold through the end of 2026. Interest-rate swaps imply that they are hedging for the potential for an increase sometime in 2027.
The US central bank cut rates three times last year in response to weakness in the job market. They paused the cuts in January, citing improvement on that front. Since then, the US Labor Department’s monthly jobs report for January was stronger than anticipated, while February data showed weakness. The March report showed nonfarm payrolls rose by the most since the end of 2024, and outgoing Fed Chair Jerome Powell last week said the job market has shown "more and more signs of stability.”
For now, the US economy’s ongoing resilience to the surge in energy prices is serving as a stabilizing force for US rates. In options linked to the Secured Overnight Financing Rate, which closely tracks Federal Reserve policy path expectations, there remains low conviction and a lack of appetite for new positioning. Investors will look ahead to a reading of the consumer price index on Tuesday for further drivers.
Longer-term US yields also slipped back after breaking above 5% on the 30-year tenor this week, as investors locked in rates trading around multi-year highs. That threshold, breached because of concerns over inflation and the possibility of Fed interest-rate hikes, was viewed by some as a "line in the sand” for the market.
To ease the pressure, the Treasury Department has leaned more on short-term bills rather than longer-term bonds to finance its borrowing needs. It said this week it will keep nominal note and bond sale sizes unchanged "for at least the next several quarters,” maintaining guidance it has given for the past two years.
For next week, investors will turn their focus to the consumer price index report and the auctions of three-, 10- and 30-year notes and bonds. Economists expect consumer prices to rise 3.7% in April from a year earlier, the highest since 2023.