June 30, 2025
By Serafino Tobia, Director of Agency CMBS Trading and Portfolio, Greystone
US Treasuries
10-year Treasuries are yielding 4.26% as of this morning, 8 basis points lower on the week. 10-year bonds traded in a 16-basis point range on the week (4.24%-4.40%). The 2-year Treasury, which is more highly sensitive to Fed policy, is at 3.72% as of this morning, lower by 14 basis points on the week.
Treasury yields improved this past week with investors anticipating a more dovish Federal Reserve and the possibility of a rate cut in July or September. The odds of a July rate cut are still low (less than 25%), but Fed officials Christopher Waller and Michelle Bowman have expressed support for an interest rate cut in July if inflation stays low. While Fed Chairman Powell’s comments were less specific, he indicated that “many paths are possible” for monetary policy and that low inflation and a weaker labor could allow for an earlier rate cut. The surgical air strikes by the US on Iran’s nuclear facilities, followed by a ceasefire, reduced concerns about a crude oil-induced inflation spike and also bolstered the case for the US dollar and Treasuries as safe haven assets.
Fed to ease SLR Capital Rules - On Wednesday, the Federal Reserve approved a proposal to lower the amount of capital that the eight largest US banks are required to hold against all assets, including Treasuries. The proposal is to lower the SLR (supplemental leverage ratio) to a range of 3.5%-4.5% from the current 5% SLR capital required (6% for banking subsidiaries). Lower leverage rules will allow the large banks to own more Treasuries and allow them to take larger trading positions; in other words, new demand and added market liquidity. There’s no guarantee that the banks will use the extra available funds to buy Treasuries but it’s helpful, especially with the growing amount of Treasury debt. The eight banks are: Bank of America, BNY Mellon, Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley, State Street, and Wells Fargo.
Last Week’s Economic Data
The data last week was mixed but reflect some weakness in the economy - slower GDP growth, persistently high unemployment claims/continuing claims. Inflation as measured by the PCE index printed slightly above expectations and remains a concern. The soft data, consumer confidence and U Mich consumer sentiment reflects ongoing uncertainty about the impact of tariffs on inflation and economic activity.
- Conference Board Consumer Confidence Index – Consumer Confidence Index for June printed lower at 93 versus May’s level at 98.4 as revised. Recall May’s survey was taken just after the May 12th reset on China tariffs. Consumers are expressing concern about tariffs and their impact on prices and the economy.
- GDP 1st Quarter – Q1 GDP printed at -0.5% annualized with the 3rd read, a downward revision from the 2nd read (-0.2%). However, as previously noted, imports are subtracted to obtain GDP; imports were high in the first quarter as businesses pulled forward imports to avoid tariffs.
- Jobless Claims – Initial jobless claims printed at 236,000 (versus last week at 246k, as revised). Continuing claims (the number of people receiving benefits after an initial week) printed at 1.974 million, +37,000, the highest level since November 2021 and reflects businesses’ reluctance to add to head-count with the backdrop of tariff uncertainty.
- Durable Goods Orders – Durable goods new orders printed substantially higher by +16.4% last month. However, the increase was attributed to backlog sales of US transportation equipment exports to China after China lowered tariffs on US exports from 125% to 10%.
- PCE Inflation Index – The headline PCE index printed at +0.1% for the month (as forecasted and same as April). On a core basis (without the more volatile food and energy basis), the index came in at +0.2% for May versus the consensus estimate of 0.1%. The year-over-year level for the PCE index printed +2.3% in May versus 2.2% in April. Core PCE year-over-year also printed higher at 2.7% (versus 2.6% as of last month as revised).
- Personal Income printed -0.4% but the decrease is due in large part to a one-time adjustment in social security payments.
- University of Michigan Consumer Sentiment – June consumer sentiment printed at 60.7, in line with last month (60.5). U Mich Consumer inflation expectations improved but are still elevated; consumers expect 5% inflation over the next year. 5–10-year inflation expectations improved to 4% versus 4.1% as of last month.
Federal Reserve Monetary Policy - Further Delayed Tax Cuts
12 days ago, the FOMC left the overnight Federal Funds steady at 4.33% (4.25% to 4.50% target range) and provided a dot plot forecast indicating 0.5% in rate cuts by the end of 2025. Despite the recent dovish comments from Fed officials Waller and Bowman (and President Trump’s consistent calls for Powell to lower interest rates), we shouldn’t expect any rate cut at the July FOMC meeting. There is too much uncertainty about the inflation impact of the reciprocal tariffs which will only go into effect after the 90-day pause that ends July 9. And while we’re starting to see marginal softness in the labor market as evidenced by elevated initial unemployment claims and continuing claims, we haven’t seen non-farm payroll or unemployment rate levels that would indicate the need for the Fed to be more accommodating.
The Fed likely continues to wait to see how the Administration’s tariff policy (and fiscal policy – the “one big beautiful bill;” tax cuts and deficit spending) will affect economic growth, employment and inflation. Tariff-related data start showing up in August (reflecting July data) and September (reflecting August data). This suggests that the first 0.25% rate cut could be delayed until the October meeting. The Fed could also move rates lower before then if the unemployment rate rises to 4.4% or 4.5% (from 4.2% in May). We get another read of the labor market this Thursday. The yield curve now implies that the first 0.25% rate cut will occur at the September 17th FOMC meeting and another 0.25% cut at the October 29th meeting.
My Take on Longer Term Yields
10‑year Treasury yields are at the lower end of their recent range and could move lower, if economic data continues to show signs of weakness and gives the Fed a reason to resume cutting interest rates. Reciprocal tariffs are likely to reduce economic activity, though the impact won’t show up in the numbers until August or September (and of course, tariff policy will likely be modified further). Even if tariffs push inflation back to 3% later this year, it would likely be a one‑time price adjustment, not a sustained trend. The path for bond yields hinges on whether tariff‑driven price pressure outweighs the drag on the economy and jobs. The “one big beautiful bill” fiscal package adds about $3 trillion in debt over the next 10 years, raising concerns among bond investors about further deficit spending and increased supply of Treasuries.
This Week’s Economic Data
This week’s economic data releases will include several reports on the labor market, including JOLTS job openings on Tuesday, ADP employment on Wednesday, jobless claims and the US employment report on Thursday (a day early w/ Friday the July 4th holiday).
The information provided in this email, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.