(Bloomberg) — Treasuries slumped and traders further trimmed their outlook for the pace of Federal Reserve interest-rate cuts, deterred by signs of sticky price pressures.
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The selloff in US government bonds on Thursday pushed yields across the curve to the highest levels of the year. Traders pared back expectations for the timing of a Fed rate reduction, now fully pricing in the first cut in December.
While data showed growth for the quarter was softer than most economists predicted, another hot reading of underlying inflation — and an unexpected drop in weekly jobless claims — took precedence for bond traders. That sets the stage for a $44 billion auction of seven-year notes later on Thursday.
“Higher inflation and a strong jobs market are overshadowing weaker consumption,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets in a note. “Stagflation chatter will surely pick up in the wake of these figures.”
Read More: US Economy Slows and Inflation Jumps, Damping Soft-Landing Hopes
Thursday’s economic data is the latest to force Wall Street to temper its expectations for lower borrowing costs in the world’s top economy. The US bond market is set for a fifth-straight week of losses.
Gross domestic product increased at a 1.6% annualized rate last quarter, while a closely watched measure of underlying inflation advanced at a greater-than-expected 3.7% clip.
The yield on benchmark two-year Treasuries rose as high as just over 5%. Yields across the maturity spectrum touched their highest levels since November.
Swaps traders now see only about 33 basis points of Fed rate reductions for all of 2024, well below the more than six quarter-point reductions they expected at the start of the year.
“The Fed has got to buy time here. They are between a rock and a hard place,” Bob Doll, chief investment officer at Crossmark Global Investments, told Bloomberg Television on Thursday before the data was released.
Read More: High Yields Lure Buyers as US Sells $180 Billion of Treasuries
Investors have to absorb later on Thursday another slug of Treasury issuance with a sale of of seven-year notes. While appetite was solid for auctions of two- and five-year notes over the past two days, there’s less certainty regarding the next sale.
Higher rates may stoke interest, though, with the expected yield on Thursday’s auction of seven-year notes closer to last year’s multiyear high. The auction yielded around 4.72%, higher by more than 7 basis points on the day, in trading before the sale, which closes at 1 p.m. New York time.
–With assistance from Edward Bolingbroke and Elizabeth Stanton.
(Updates throughout with prices, comments and context.)
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