By Serafino Tobia, Director of Agency CMBS Trading and Portfolio, Greystone
US Treasuries
Last week, 10-year Treasury bonds traded in a 23-basis point range (4.11% - 4.34%). As of this morning, the yield is at 4.24%, the same as last Monday morning. Early last week, Treasury bonds improved across the entire yield curve. This was initially driven by a weak ISM Manufacturing PMI Index report, which added to the momentum from softer economic data received in the preceding few weeks. On Tuesday, 10-year yields rallied down to 4.11% intraday, as the markets grappled with the uncertainty and potential economic slowdown that may result from the White House's tariff announcements. However, in the late afternoon on Tuesday, rates moved back higher following an announcement out of Germany that it plans to sell €500 billion German bunds to fund a defense plan. 10-year German bunds traded as much as 0.45% higher; US bond investors couldn’t ignore this and moved Treasuries back higher as well. On Thursday, reflecting the move in German bunds along with Trump’s partial pause of Canada/Mexico tariffs, 10-year yields traded as high as 4.34% intraday and closed at 4.28% Friday morning, and yields improved marginally after the incrementally weak labor market jobs print and increase in the unemployment rate to 4.1%, higher by 0.1%.
The saying "bad news is good news" in the bond market means that when there is negative news about the economy and employment, bond prices rise, and yields move lower. “Bad news is good news” works in reverse as well – Fed Chairman Powell spoke early afternoon on Friday and his remarks were viewed as constructive – and the stock market improved. Consequently, the safe-haven trade into Treasuries reversed and the 10-year yield moved higher by about 8-9 basis points, ending the day at 4.31%. This morning, yields are lower as the bond market processes President Trump's comments from yesterday about "a period of transition," adding to concerns about a potential economic slowdown with the tariff policy.
Last Week’s Economic Data
The economic data last week was mixed but continues to reflect some underlying weakness in the economy.
- ISM Manufacturing Index – On Monday, the ISM Manufacturing Index printed at 50.3 for February, incrementally lower than January at 50.9 and lower than the consensus estimate at 50.7. While only incrementally lower, the index added to the narrative about a weakening economy and Treasury yields across the entire yield curve gapped lower Monday morning by 6 basis points after the print.
- ADP Report – On Wednesday, ADP reported February private payroll increased by 77,000 jobs, substantially below the pre-announcement economists’ consensus estimate of +140k and less than half of last month’s +186k job growth, as revised.
- ISM Services Index – Also on Wednesday, the ISM Services Index printed at 53.5 for February, higher than last month at 52.8 and higher than the consensus estimate at 52.5.
- Weekly Initial Jobless Claims – On Thursday, Initial Jobless Claims were lower than expected at 221,000 versus the pre-announcement estimate at 233k and less than the prior week’s print at 242k.
- US Employment Report – On Friday, the February non-farm payroll printed +151,000 new jobs, marginally lower than Wall Street’s estimate at +160k. January’s print was revised lower to +125k, originally reported at +143k). The unemployment rate ticked up to 4.1%, 0.1% higher than last month’s 4.0% print. Average Hourly Wages (i.e., wage inflation, also part of the labor report), moved higher by 0.3% in February versus 0.4% the previous month (as revised).
Fed Monetary Policy – On Hold
Since mid-December, the overnight Fed Funds rate has been pegged at 4.33% with the Fed’s target range at 4.25% - 4.50%. The Fed Funds rate is arguably still restrictive, but inflation has been sticky at around 2.50% (as measured by the PCE index) and the Fed is waiting for inflation to re-establish a path towards the inflation target of 2%. The Fed is also watching the health of the economy and employment (part two of the Fed’s dual mandate). So far, there is nothing for the Fed to point to that would allow it to resume interest rate cuts. The most recent inflation prints for January (CPI, PPI and PCE) were surprisingly high. With regard to the Fed’s other mandate, there are signs that the labor market is starting to weaken, but February’s non-farm payroll print at around +150k and 4.1% unemployment rate is still solid. Granted, there are reasons to think that we will start to see weaker employment data over the next few months (in part due to DOGE job cuts and the likely impact of the President’s tariff policies); however, we just haven’t seen significantly weak empirical payroll numbers as yet. The Fed will likely need to see a couple monthly prints of Core PCE inflation at 0.2% and/or an increase in the unemployment rate to 4.2%-4.3% (currently at 4.1%). With the improvement on the short end of the yield curve, the yield curve now implies a 0.25% cut at the FOMC meeting on June 18th, another 0.25% cut at the meeting on September 17th and an 82% probability of one further cut by year-end 2025.
My Take on Longer Term Yields
The momentum to lower yields seems to have stalled around 4.25% +/-. Bond investors are looking for additional evidence of weakness in the economy, further clarity of federal policy (tax cuts and deficit spending, federal budget and tariffs) and/or improvement in inflation. These factors would support the Fed to resume cuts to interest rates. With 10-year yields at around 4.25%, we’ve already had a 56 basis point improvement over the past two months (high mark at 4.80% on 1/14). There are a number of narratives that could move yields even lower and I’m inclined to expect investors to front-run and resume further improvement in yields; we just need more evidence. Let’s see how CPI and PPI inflation data come in this Wednesday and Thursday. Job growth also likely slows further over the next few months (as discussed above). On a technical basis, bond yields can also move lower with a further trade-off in the equity/stock market with investors moving into Treasuries as the primary safe-haven asset.
Upcoming Economic Calendar
The highlight of the economic data this week will be February’s consumer price index (CPI) on Wednesday and Producer Price Index (PPI) on Thursday. The key data point will be Core CPI (without the more volatile food and energy prices). For Core CPI, the market is expecting +0.3% for the month (versus January’s high print at 0.4%). Headline CPI is also forecasted at +0.3% month-over-month (versus last month’s high print at 0.5%). This week, we also see JOLTS Job Openings Report tomorrow, weekly Jobless Claims on Thursday and University of Michigan Consumer Sentiment on Friday. Recall, the University of Michigan Consumer Sentiment printed lower in February at 64.7 versus January at 67.8. The last U Mich survey also showed that consumer inflation expectations were highly elevated - 1-year inflation expectations printed 4.3% and 5-10-year inflation expectations 3.5%.
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