US Treasuries end week on high note on demand for safer bets

A LATE rally in the US Treasury market pushed the yield on 10-year notes lower for a sixth-straight week as traders hunt for safety amid lower stock and oil prices.

The advance pushed yields lower across maturities on Friday (Feb 21) following unexpectedly weak economic data and an uptick in consumers’ long-run inflation views to the highest since 1995. The yield on 10-year notes later fell by as much as 10 basis points in afternoon trading, echoing losses in equities.

“The ‘strong growth’ narrative is being challenged today,” said Ed Al-Hussainy, global rates strategist at Columbia Threadneedle, adding that moves stand to be exacerbated by lower liquidity in a Friday afternoon.

The 10-year yield on Friday fell as far as 4.4 per cent, the lowest since Feb 7, before slightly paring the move. It is on pace for a sixth-straight week of declines, the longest falling streak since 2019. The Bloomberg Dollar Spot Index was higher by 0.2 per cent. Crude oil fell almost 3 per cent. 

Traders also priced in more interest rate cuts by the Fed this year, putting approximately 28 per cent chance of a 25-basis-point reduction in May compared to 16 per cent priced at Thursday’s close. They’re now pricing in the central bank’s first 2025 cut in July rather than September. 

The moves began earlier in the day after survey reports showed US business activity slowed, consumer confidence waned, and inflation expectations surged. They extended later in the afternoon as traders circulated a study showing researchers in China said they discovered a new coronavirus in bats.

Friday’s economic reports added to a string of weaker-than-expected data recently, including retail sales, helping to push Citigroup’s Economic Surprise Index to a five-month low. 

The Department of Government Efficiency’s (DOGE) efforts to cut US spending also raised concern among some investors, including billionaire Steve Cohen, that it may slow the economy. Ten-year yields have fallen about 40 basis points since peaking at 4.8 per cent in mid-January, shortly before Trump took office.

The bond rally is a “combination of the market believing that DOGE may have a larger negative impact on the US economy than initially anticipated” and “the tightening of financial conditions associated with lower equity prices,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. 

ING’s regional head of research Padhraic Garvey trimmed his year-end call for US 10-year yields to 5 per cent from 5.5 per cent previously, citing spending cuts related to the DOGE, Treasury Secretary Scott Bessent’s focus on lower bond yields and potential bank deregulation which may encourage bond buying.

The consumer confidence survey on Friday offered evidence that uncertainties about President Donald Trump’s policies may have started to weigh on the economy, said Byron Anderson, head of fixed income at Laffer Tengler Investments. 

“Markets want a clear direction, and the more chaos and uncertainty you add, volatility will go up,” Anderson said. “I cannot get a clear thesis in markets, so I’ve just been adding to safety in the portfolio.”

Next week’s key economic data includes the Fed’s favored inflation gauge – the personal consumption expenditure price index. The government will also auction two-, five- and seven-year notes next week, totalling US$183 billion. BLOOMBERG