Displaying items by tag: Treasuries

The debate over how far the Federal Reserve will cut interest rates is sharpening as a backlog of key U.S. economic data finally comes into focus. Delayed employment and inflation reports, followed by fresh jobs data early in the year, are expected to clarify whether the Fed is nearing the end of its easing cycle or will need to cut more aggressively. 

Bond traders are betting on two rate cuts next year, more than the Fed currently signals, fueling optimism that Treasuries could extend a rally already shaping up as their strongest since 2020. 

The labor market sits at the center of the outlook, with upcoming jobs data seen as the most important input for determining the path of rates. Yield curves reflect this uncertainty, as shorter-term yields have fallen while longer-term rates remain elevated, widening the spread between the two. 

Finsum: If the Fed pauses amid sticky inflation, Treasury returns may rely more on coupon income than price gains, keeping the market range-bound despite elevated expectations.

U.S. Treasury yields fell sharply on Thursday, with the 10-year yield dropping below 4% following a weaker-than-expected Philadelphia Fed survey showing deteriorating regional economic conditions. The 10-year Treasury yield declined over 7 basis points to 3.98%, while the 2-year yield dropped to 3.42% and the 30-year fell to 4.59%, marking their lowest levels in months. 

The decline came as stocks tumbled, led by bank shares, amid growing concern over bad loans, trade tensions, and the ongoing U.S. government shutdown. With the shutdown delaying key economic reports, investors are turning to Fed speeches for clues ahead of the October 28–29 FOMC meeting, where futures markets now overwhelmingly price in a 25-basis-point rate cut.

Federal Reserve officials offered conflicting views on how quickly to cut interest rates given a weakening labor market and geopolitical uncertainty. 

Finsum: Now could be the time to jump on treasuries as yields slump and prices are driven up on the uncertainty. 

Treasury yields declined on Tuesday as investors grew more confident that an immediate escalation in the U.S.-E.U. trade conflict might be avoided. The 30-year yield fell to 4.984% and the 10-year to 4.475%, coinciding with a rise in stock futures. 

This drop in yields suggests renewed investor demand for government bonds, signaling reduced risk sentiment and a preference for safety. The shift followed President Trump’s decision to delay imposing new tariffs on the European Union, pending further negotiations. 

While E.U. officials expressed optimism about a potential deal, recent trade tensions have already rattled markets, leading to weak demand for U.S. Treasurys in last week’s auction. 

Finsum: Compounding concerns is a major Republican policy proposal moving through Congress that lacks full funding, raising additional doubts about America’s fiscal outlook.

While stock selection often gets the most attention, the true driver of portfolio performance is typically asset allocation, with around 90% of variability linked to how investments are distributed across asset classes. Different asset classes perform well under different economic conditions—stocks might excel in growth periods, while bonds provide stability during downturns. 

Goldman Sachs has analyzed various economic scenarios to suggest optimal asset mixes for maximizing risk-adjusted returns over the next decade. For sluggish growth or stagflation, they recommend a heavier allocation to Treasury bonds and real assets, while minimizing exposure to growth stocks. 

In a scenario of strong growth and low inflation, the maximum allocation to stocks should still be capped around 70%. Ultimately, a diversified mix, including US Treasuries, remains crucial regardless of the economic outlook.

Finsum: Keep in mind the relative risk profiles of these asset classes when constructing your portfolio. 

Treasuries gained momentum following a weaker-than-expected U.S. producer prices report, reinforcing the potential for the Federal Reserve to lower interest rates more aggressively. The two-year yield, which closely mirrors Fed policy expectations, fell by 8 basis points, while the 10-year yield decreased by 6 basis points. 

Market participants are now eagerly anticipating the upcoming consumer price index (CPI) data, which could further influence rate-cut expectations. However, some Federal Reserve officials remain cautious, emphasizing the need for more economic data before supporting any rate reductions.

Despite recent market volatility, with shifts from expectations of a soft landing to a hard landing, uncertainty persists. 

Finsum: Markets thought there was going to be an emergency Fed meeting last week, but look to Jackson Hole for better clarification.