Treasuries Fall After Strong Factory Gauge Erodes Rate-Cut Bets

The US Treasury building in Washington. Photo by Samuel Corum /Bloomberg

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(Bloomberg) — Treasuries fell after US manufacturing activity unexpectedly jumped, prompting traders to pare bets on Federal Reserve interest-rate cuts this year.

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Yields climbed as much as five basis points, led by short-maturity tenors that are most sensitive to Fed rate changes. The benchmark 10-year note’s rate rose to 4.27%, the highest in more than a week. 

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The market was already under pressure before the ISM manufacturing gauge for January surged at its fastest pace since 2022. The announcement of a large corporate bond offering from Oracle Corp. further weighed on Treasuries. 

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Following the manufacturing data, traders downgraded the odds of interest-rate cuts from the Fed, which last week paused reductions. Interest-rate swaps show the next cut coming in July.   

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For Vail Hartman, a US rates strategist at BMO Capital Markets, the move in Treasury yields is on the verge of opening the door for buyers to come in.  

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A move back to recent peaks in the 10-year yield around 4.30% “will be an attractive entry point to bring in sidelined investors awaiting a dip-buying opportunity,” Hartman said.

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Earlier in the session, Treasuries registered small gains fueled by demand for havens after a plunge in precious metals spilled over into other markets. Also, prices for most energy commodities slumped, potentially easing inflation pressure.

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Meanwhile, bond investors continue to evaluate how the Fed’s policy path might be altered by US President Donald Trump’s selection of Kevin Warsh to succeed Jerome Powell as Fed chair. Analysts are ransacking the former central banker’s speeches for clues.

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“Warsh has been on the hawkish side, and a critic of the Fed’s expanded balance sheet,” said Mohit Kumar, chief economist and strategist for Jefferies International, who analyzed Warsh speeches back to 2011. “But it is equally difficult to square the fact that Warsh could have sold his hawkish credentials to Trump and still got the Fed chair job.”

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Fed policymakers paused after cutting rates at their previous three meetings in response to signs of weakness in the US labor market. Those signs have faded, and information such as the ISM factory gauge — whose employment component also was stronger than economists estimated — bolster the argument that cutting rates further could reignite inflation, which continues to exceed the central bank’s 2% target.

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Balance Sheet

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BlackRock Inc., Bridgewater Associates and Pacific Investment Management Co. were shoring up their portfolios against a fresh bout of inflation prior to the announcement. 

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Markets are also weighing changes that Warsh, a former Fed governor, might make to the balance sheet. He has repeatedly and loudly blasted his old colleagues over the years for letting the bank’s assets balloon via so-called quantitative easing, prompting speculation in markets that he could move quickly to draw them down.