Treasuries experienced an uptick at the start of Friday’s trading session, but faced significant selling pressure as the day progressed.
Initially, bond prices soared, but they later retreated sharply, turning firmly negative. Consequently, the yield on the benchmark ten-year note— which inversely correlates with its price—rose by 5.5 basis points to 4.343 percent, after dipping to a low of 4.261 percent.
Treasuries found early support from a favorable response to a Commerce Department report, which indicated that consumer price inflation for May met economist expectations. Specifically, the personal consumption expenditures (PCE) price index remained flat in May following a 0.3 percent increase in April, and the annual growth rate moderated to 2.6 percent from 2.7 percent.
Moreover, the core PCE price index—excluding volatile food and energy prices—edged up by 0.1 percent in May, having risen by an upwardly revised 0.3 percent in April. The annual growth rate for core prices decelerated to 2.6 percent in May, aligning with economist predictions, down from 2.8 percent in April.
Although the data initially fueled optimism regarding the interest rate outlook, the buying interest dissipated throughout the session. Some analysts pointed to the continued pace of consumer price growth, which remains above the Federal Reserve's 2.0 percent target, suggesting that this data is unlikely to prompt the central bank to expedite rate cuts.
John Lynch, Chief Investment Officer at Comerica Wealth Management, commented, “While an improvement from earlier trends this year, the revised GDP data's inflation readings highlight persistent pricing pressures. The anticipated number of rate cuts for this year has steadily decreased, but traders persist in disregarding the Fed's 'higher for longer' stance. Given that the fed funds rate still exceeds nominal GDP growth, we foresee the Fed cutting rates 1-2 times over the next six months. Any expectation for additional accommodation, barring a recession, is likely misplaced.”
Looking ahead, next week’s focus is likely to be on the monthly jobs report. Remarks from Fed Chair Jerome Powell, as well as reports on manufacturing and service sector activity, may also draw attention. However, overall trading activity could be somewhat muted due to the Independence Day holiday on Thursday.
