(April 1): Treasuries erased gains in US trading on Wednesday after economic data showed steady hiring and consumer spending on goods, offsetting the prospect of an end to the war in Iran that could pave the way for Federal Reserve (Fed) interest-rate cuts.
Yields were higher by one to two basis points after rebounding from the lowest levels in more than a week, reached amid a drop in crude oil benchmarks, which also has faded. Treasury yields tracked a war-related surge in oil prices for much of the past month because of their potential to stoke inflation and delay Fed rate cuts.
Wednesday’s rebound in yields initially tracked oil prices, then gathered pace after two US economic data releases. February retail sales exceeded economist estimates, as did ADP Research’s estimate of March private-sector hiring. Fed policymakers cut interest rates three times last year in reaction to signs of job-market weakness that have since abated somewhat.
St Louis Fed president Alberto Musalem, speaking on Wednesday, said risks were rising to both inflation and employment, and officials should be prepared to adjust interest rates in either direction depending on how the economy evolves.
Oil prices, meanwhile, have tracked sentiment shifts regarding the potential for an end to the Middle East war — started by US President Donald Trump on Feb 28 — that has disrupted supply from the region. Session lows were reached after Trump late on Tuesday said on it could conclude within two to three weeks. He plans to address the nation at 9pm in Washington on Wednesday.
See also: US retail sales in February rise by more than forecast in broad advance
“For Trump, this is not something he can afford to let drag on, with approval ratings starting to decline and risk continuing to fall,” said Kenta Inoue, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co in Tokyo. As concern over an energy crisis eases, “the short-end of the yield curve is expected to drop to price in Fed rate cuts, while the long end will struggle to rise”.
Bloomberg Intelligence rates strategists Ira Jersey and Will Hoffman on Wednesday boosted their forecast for the US two-year yield to 3.4% by the end of the year, from nearly 3%, on the likelihood that the Fed will delay rate cuts until at least the final quarter of 2026.
Traders, meanwhile, are pricing in about seven basis points of Fed easing by year-end, in a sharp contrast the week-ago consensus that tilted towards a hike.
See also: US companies add 62,000 jobs, led by healthcare, says ADP
Trump’s address “will test how durable this optimism really is”, said Evelyne Gomez-Liechti, a multi-asset strategist at Mizuho in London.
The bond market is still smarting after last month’s sell-off, when inflation risks triggered by surging oil prices drove US yields around 40 basis points higher. As a result, a Bloomberg gauge of US government bond returns lost 1.7% in March, the biggest monthly decline since late 2024.
The market has been whipsawed by shifting views on rising energy prices, which also have the potential to dent economic growth. Fed policymakers have offered divergent views on whether oil-related inflation is likely to be transitory. And even if the war ends soon, it’s unclear when the supply shock would end.
“The challenge bonds are facing is, is it inflation? Or is it a growth scare?” said Remi Olu-Pitan, the head of multi-asset growth and income at Schroders, told Bloomberg TV in an interview. “Every day it seems to be a different headache, and that’s one of the reasons why we are staying out.”
The lack of conviction from the Fed on inflation risks “means staying on hold, staying put because it’s dangerous to react when things are changing”, Olu-Pitan said, adding that the longer the Strait of Hormuz remains closed to energy shipments, “the more we have to think about growth damage”.
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