Treasuries Fall As Traders Pare Bets On Rate Cuts This Year

US Treasuries extended losses as Federal Reserve Chair Jerome Powell struck a hawkish tone, putting in doubt the likelihood of an interest-rate cut at the central bank’s September meeting. 

Two-year yields, which are the most sensitive to the Fed’s policy, rose five basis points to trade at 3.92% while rates on other maturities edged higher as Powell spoke at an afternoon news conference.  

Powell said the board has made no decision about making a move at its mid-September meeting. Traders pared bets on rate reductions this year and are no longer fully pricing-in a cut at the following meeting in October. 

“Powell sounds a little on the hawkish side, acknowledging the labor market is in balance, and inflation is above target,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management. “He also mentions that the economy does not behave like the rate is restrictive.”

In a move that was expected by the market, Governors Christopher Waller and Michelle Bowman voted against the Federal Open Market Committee maintaining its key borrowing rate at 4.25% - 4.5%, a range in place since December. It was the first time since 1993 that two Fed Governors dissented at the same meeting.

Waller is among the names favored to succeed Powell, whose term expires next year and who has been pressured in recent months by President Donald Trump to cut rates.

Ahead of the policy statement, Trump said, “I hear they’re going to do it in September, not today,” at a bill signing ceremony at the White House.

At the prior meeting in June, Fed officials updated their quarterly rate forecasts and the so-called ‘dot plot’ showed a divided committee, with almost as many officials anticipating one or no quarter-point cuts, versus those expecting two or more. Traders have slightly lagged the median FOMC forecast amid a string of solid data in July, with swaps showing 43 basis points of easing by December.

Earlier, Treasuries slumped after a report on gross domestic product showed resilience in the US economy.

Powell said it’s still early days to judge the effect of trade tariffs on inflation. 

Inflation-adjusted GDP increased at an annualized rate of 3%, topping economist estimates, after shrinking at a 0.5% rate in the previous period, according to preliminary government data. The report was released at the same time as the Treasury Department’s announcement that it will maintain the size of its debt auctions while increasing the frequency of buyback operations to help bolster liquidity for some longer-dated bonds.

In its quarterly announcement on debt issuance, the Treasury Department, as expected, said it will sell $125 billion at next week’s refunding auctions while adding that it’s increasing the number of buyback operations for longer-dated debt. 

The department said it anticipates keeping the size of its note and bond auctions unchanged “for at least the next several quarters.” That’s the same guidance officials have given since the start of last year, and it leaves bills — which mature in up to a year — bearing the brunt of the government’s rising borrowing needs.

“This (refunding) is close to what we thought would be,” Blake Gwinn, head of us rates strategy at RBC Capital Markets, said on Bloomberg Television. “This would be mostly market neutral. Bond markets seem to be taking this well in stride.”