Longer-dated U.S. Treasury yields rose on Friday as traders evaluated how many times the Federal Reserve could cut rates this year, while increases in European government bond yields also dragged U.S. yields higher. The Fed is seen as being all but certain to cut rates in September as the labor market and other economic indicators point to a slowing economy. So far tariffs have not passed through to consumer price inflation, which boosts the chances of a cut next month.
Hotter-than-expected producer price inflation on Thursday, however, tempered expectations that the U.S. central bank will undertake a larger-than-typical 50 basis points move.
“The yield curve keeps steepening. I think that’s a function of the Fed rate cuts that are coming in September,” said Tom di Galoma, managing director at Mischler Financial Group.
“I don’t think they’re going to do 50 in September, I think 25 is probably more logical at this point, just given the fact that Powell seems to be reluctant to go at all.” Fed Chair Jerome Powell has expressed reluctance to cut rates as he anticipates U.S. President Donald Trump’s tariff policies will increase inflation this summer.
Investors will focus on whether Powell pushes back against market pricing of rate cuts at the U.S. central bank’s annual economic policy symposium in Jackson Hole, Wyoming, next week. Yields briefly rose after data on Friday showed U.S. retail sales increased solidly in July, boosted by strong demand for motor vehicles as well as promotions by Amazon and Walmart.
The 2-year note yield, which typically moves in step with Fed interest rate expectations, was last down 0.9 basis points on the day at 3.73%.
The yield on benchmark U.S. 10-year notes rose 0.9 basis points to 4.302%.
The yield curve between two-year and 10-year notes steepened by around 2 basis points to 57.4 basis points, the steepest since July 16.
Longer-dated yields are being pulled higher in line with increases in European government debt yields.
“Curves keep steepening there and they just keep selling off,” said di Galoma.
German 10-year yields reached 2.78% on Friday, the highest since March 27. German 30-year yields reached 3.354%, the highest since 2011. Analysts at ING said on Friday that implied volatility increases in the very long end of the euro swap curve are likely due to an upcoming Dutch pension transition.
“We are seeing this behaviour in the US where the fiscal deficit is worrying investors, but in the euro space the 30Y swap spread has remained fairly constant the past months. We therefore see the anticipated Dutch pension funds’ rotation away from longer-dated swaps as a potential driver behind recent moves,” they said. Traders are also focused on talks to end the Russian war in Ukraine. Trump and Russian President Vladimir Putin meet at a Cold War-era air force base in Alaska on Friday to discuss a ceasefire deal for Ukraine that the U.S. sees as a possible way to end the deadliest war in Europe since World War Two.
(Reporting by Karen Brettell in New York; Editing by Nia Williams)
