By Serafino Tobia, Director of Agency CMBS Trading and Portfolio, Greystone
US Treasuries
- 10-year Treasuries are currently at 4.41%, 4 basis points higher this past week and with a trading range of 11 basis points this past week (4.33% - 4.44%).
- 2-year Treasuries are at 3.93% this morning, 8 basis points higher since last Monday.
10-year bonds continue to trade in a relatively narrow range. Seemingly without any specific catalyst, bonds moved to the low-end of the range last Tuesday to 4.33%, the lowest level since July 10th. Bonds traded to the high end of the range Thursday morning after weekly jobless claims printed 217,000, reflecting a steady job market, and more importantly to the bond market, not giving the Fed any reason to ease monetary policy.
This week, the bond market will closely track Wednesday’s Fed decision—especially the FOMC statement and Fed Chairman Powell’s press conference—alongside a packed data calendar featuring PCE inflation, GDP, and Friday’s U.S. jobs report.
Last Week’s Economic Data
Last week’s data largely reflected continued strength in the services economy but weakness in manufacturing and housing and mixed consumer signals.
- Conference Board Leading Index – The leading index declined 0.3% in June as expected and after a 0%, no change, read in May, as revised.
- S&P Global Purchaser Managers' Indices (PMI) - Services PMI rose to 55.2 (a seven month high). Manufacturing PMI printed at 49.5 versus previous print of 52.9; sub-50 indicates contraction.
- Durable Goods Orders - June durable goods orders printed - 9.3% versus the consensus estimate at -10.7%. This is after a +16.5% increase in May, as revised.
- Existing-home sales printed -2.7% annualized for June, the slowest pace since September last year. New house sales printed +0.6% for June after -11.6% in May, as revised.
Fed Monetary Policy: Wait-and-See Extended
The Fed’s FOMC meets tomorrow and Wednesday and it’s widely anticipated that we will not receive any change in interest rates. Fed governor Waller will be advocating for a cut in the Fed Funds rate. However, there are 12 votes on the FOMC and the consensus is that there is still reason to stay on hold to see how the government’s tariff policies – sector tariffs, country-specific reciprocal tariffs—will impact inflation and the economy. Before the subsequent FOMC meeting on September 17th, we will see two more employment reports – this Friday, August 1st and Friday September 5th. Economists are expecting the unemployment rate to tick higher by 0.1% to 4.2% this Friday. However, the Fed likely needs 4.3% unemployment or higher in order to justify moving rates lower.
The overnight Fed Funds rate remains at 4.33% (4.25%–4.50% target range). The yield curve implies 0.575% in rate cuts by year-end— a little over two ¼ point rate cuts. The first cut is anticipated at the Fed’s meeting October 29th with around a 60% possibility of a cut at the meeting on September 17th. The yield curve also implies an additional 0.69% in rate cut in 2026 (a bit less than three more ¼ point rate cuts), with the Fed Funds rate moving down to 3.185%.
My Take on Longer Term Yields
Bond investors are handicapping:
- Headwinds for Bonds
- Growing fiscal deficits
- Anticipated increase in Treasury bond issuance/supply
- Potential decline in foreign demand for U.S. Treasuries
- Inflationary impact from tariffs
- And Possible Upside Factors
- Economic data that signals the economy is slowing, tariff driven or otherwise
- A level of weakness sufficient to prompt the Fed to lower interest rates.
The data has not shown a substantive impact from tariffs so far. As you're aware, country-specific reciprocal tariffs are set to take effect beginning August 1st, imposing import duties ranging from 10% to 50%, depending on the country of origin. There are still a lot of negotiations underway, but we would expect about a 15% import tariff on average. There will be an impact on prices (i.e., inflation) and consumer demand, but there is likely a lag; tariffs will likely not be fully reflected in the data until the fourth quarter of this year.
Tariffs aside, the economy has been relatively stable, but there are subtle signs of weakness in the job market. While the headline print of June employment was solid with non-farm payroll growth at 147k jobs, the private payroll was actually soft – just 74k jobs versus 137k private payroll jobs in May. The unemployment rate was also solid, 4.1%, a 0.1% improvement versus May. This Friday’s job report will give us further insight – the consensus estimate is for non-farm payroll to increase by 109k jobs, and the unemployment rate is expected to tick back up to 4.2%.
In the near term, yields won’t move much until we get data that provides insight on the direction of the economy and inflation. Certainly, investors will also remain sensitive to foreign capital flows and Fed signaling.
This Week’s Economic Data
The highlight this week will be the FOMC interest rate decision and statement (2 PM) and Fed Chairman Powell’s press conference (2:30 PM) on Wednesday. This week’s economic data releases will include PCE inflation figures, gross domestic product (GDP), as well as several reports on the labor market, including JOLTS job openings on Tuesday, ADP employment on Wednesday, jobless claims on Thursday and the US employment report on Friday.
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.