U.S. Treasury bonds posted modest gains, concentrated particularly in short-term bonds, as investors look ahead to a slew of delayed U.S. economic reports due this week that have the potential to alter expectations about whether the Federal Reserve will continue cutting interest rates next year.
Yields on most maturities fell by at least two basis points, keeping them within ranges for this month, according to Bloomberg.
The yield on two-year bonds fell to 3.49%, after dropping by about eight basis points on December 10 when the Federal Reserve cut interest rates by a quarter point as expected.
Bonds with maturities ranging from two to ten years outperformed bonds with longer maturities, widening the gap in their yields.
This trend has accelerated since last week's Federal Reserve meeting, fueled by expectations that further interest rate cuts could lead to higher inflation—a view shared by many central bank officials. Traders are now anticipating two more quarter-point rate cuts in 2026 to support the economy, double the number the Fed has projected.
The two most recent interest rate cuts, out of three implemented by the Federal Reserve this year, came amid a partial lack of information due to the six-week US government shutdown, which delayed the release of several key economic data points. Several major data releases, originally scheduled for October or November, are now due this week, including November employment figures and consumer price data.
Jack McIntyre, portfolio manager at Brandywine Global Investment Management, said any change in investment expectations would depend on the data, but cautioned that this week's reports would still be affected by the government shutdown and might appear less accurate than they should be. This movement in the yield curve is further supported by Treasury auctions, which this week include the re-offering of 20-year notes and Treasury Inflation-Protected Securities (TIPS).
The November jobs report is expected to show the addition of 50,000 jobs in the non-farm sectors, with the unemployment rate expected to rise to nearly 4.5%, the highest level last seen in 2021. Tony Rodriguez, head of fixed income strategy at Noeven, warned that there is no room for further cuts without losing credibility and negatively impacting the long-term bond market, unless the data supports them.
