Treasuries Advance as Powell Paves Way for September Rate Cut

(Bloomberg) -- Treasuries rallied after Federal Reserve Chair Jerome Powell said an interest rate cut could happen as soon as September, a scenario that traders have fully priced in.  

The gains pushed yields lower across the curve on Wednesday after the Fed chief said the time was coming for the central bank to start lowering borrowing costs. Yields on two-year notes slid by three basis points, while traders priced a minimum of two rate cuts this year starting at the next meeting. 

While Fed officials left their benchmark rates in a range of 5.25% to 5.5% as expected, bond investors were heartened by Powell’s remarks that data is moving in the right direction for easier monetary policy. 

“They just decided to maintain the full optionality,” Bob Michele, chief investment officer for fixed income at JPMorgan Asset Management, said on Bloomberg Television. “We are still very much expecting 25 basis points in September.”

Interest-rate swaps showed traders are still fully priced in a quarter point cut in September — and a total of almost 70 basis points worth of reductions for the year. 

“The committee is not ready to fully commit to a September cut,” said Leah Traub, portfolio manager at Lord Abbett & Co. “So they are not going to promise one. But they are clearly still moving closer to a cut, and I think September is fully on the table.”

In its statement, officials said the Fed is “attentive to the risks to both sides of its dual mandate,” adding that they doesn’t expect to cut rates “until it has gained greater confidence that inflation is moving sustainably toward 2%”

That casts a spotlight on the US labor report on Friday. Signs of a cooling labor market helped send 10-year yields down some 30 basis points this month, marking the biggest decline this year. The Bloomberg’s benchmark for Treasuries returned 1.7% this month, turning a loss to a 0.8% gain for the year.  

Earlier on Wednesday, a private payroll report showed the US added the fewest number of workers since the start of the year. A separate government report showed a broad gauge of US labor costs increased less than forecast in the second quarter. 

Also on Wednesday, the US government left its quarterly sales of longer-term debt unchanged for the second straight time and said it plans to hold the issuance steady for “several quarters.” The result was widely anticipated by primary dealers. 

In the currency market, the Fed announcement amplified the impact of the Bank of Japan’s own hawkish meeting earlier in the session. The yen earlier rose to its strongest level since March while a Bloomberg gauge of the dollar fell as much as 0.6%, the sharpest retreat in nearly three weeks, to session lows as Powell spoke.

--With assistance from Edward Bolingbroke.

More stories like this are available on bloomberg.com

©2024 Bloomberg L.P.