Treasury yields surged, with some hitting year-to-date peaks, driven by growing optimism about the economy as investors questioned whether the US would require as many Federal Reserve interest-rate cuts as previously anticipated.
Although Friday saw minimal revisions to the 2023 consumer price index data, the S&P 500 index reached a new record high, buoyed by growth stocks. Additionally, Canadian employment data for January surpassed economists’ expectations, mirroring the upbeat US jobs report from the previous week.
Market expectations for Fed rate cuts dwindled further, maintaining a quarter-point move in June and a total of four cuts for the year. Fed officials have indicated that further easing may be warranted if economic data continues to show signs of slowing growth after 11 consecutive rate increases over the past two years.
Tracy Chen, a portfolio manager at Brandywine Global Investment Management, emphasized the significance of economic data in driving market sentiment, suggesting that a consensus on a “soft landing” could mitigate the need for further intervention.
Shorter-maturity Treasury yields, including two-, three-, and five-year yields, reached their highest levels since December 13, climbing less than five basis points on the day. In contrast, longer-maturity yields, less sensitive to changes in Fed policy, experienced milder increases.
Canada’s robust employment data, coupled with positive US indicators for January, contributed to market confidence. The Citi Economic Surprise Index, reflecting the trend in data releases relative to expectations, reached its highest levels since November, further reinforcing the upbeat sentiment.
Earl Davis, head of fixed income at BMO Asset Management, highlighted concerns about the impact of economic data on the initiation of an easing cycle, attributing pressure on the Treasury market to these apprehensions.
Expectations for a significant influx of new corporate bonds next week, particularly ahead of the January CPI data release, added further pressure on Treasury yields.
Economists surveyed by Bloomberg anticipate a drop in the US year-on-year inflation figure for January, potentially alleviating concerns about rising inflationary pressures.
Felipe Villarroel, portfolio manager at TwentyFour Asset Management, cautioned against unexpected surprises in upcoming inflation data releases, emphasizing the importance of consistent progress towards inflation targets.
Despite a recent selloff, prompted in part by losses incurred by buyers of this week’s Treasury auctions, some investors view current yield levels as attractive, anticipating eventual rate cuts and considering Treasuries as a hedge against market volatility and risk assets.
