Bonds Hold Recent Gains As Powell Reiterates Rate-Cut Message

(Bloomberg) -- The US bond market held onto recent gains after Federal Reserve Chair Jerome Powell in congressional testimony reiterated the message he delivered in January — that interest-rate cuts are likely this year provided that inflation data continue to show improvement.

Powell’s prepared remarks for his House Financial Services Committee appearance at 10 a.m. in Washington left intact expectations that the Fed will deliver three quarter-point rate cuts this year, with the first one in June or July. Earlier Wednesday, a report on private-sector job creation was slightly weaker than expected, sending Treasury yields to session lows. A measure of job openings coincides with Powell’s testimony. 

Powell’s remarks were “straight down the middle,” said George Goncalves, head of US macro strategy at MUFG Securities Americas Inc. The Fed chair’s comments after the January policy meeting curbed expectations for how much monetary easing was likely this year, so “the moment you sound remotely dovish, the risk is markets run with it.”

Nor did Powell’s comments set the stage for a less-dovish message from policymakers at their next meeting in late March. Global bonds came under pressure earlier this year as the declining trend in inflation has slowed and investors flock to riskier assets as stocks and corporate bonds.

Treasury yields, most of which reached the lowest levels in nearly a month on Tuesday after a gauge of US services-sector activity was weaker than anticipated, remained near those levels. The benchmark 10-year note’s yield declined nearly 4 basis points to 4.12%, within a basis point of Tuesday’s low.

Powell isn’t like to convey “anything new about the Fed’s posture ahead of the March FOMC, which leaves markets to hang tight and digest data,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investment. “The good news is that we have done a lot of work to take out some of the excessive rate normalization priced in at the end of December.”

While traders still see rate cuts as early as June, their forecast is more aligned with the Fed’s than it was at the start of the year. At the time, the consensus had settled around cuts totaling more than 1.5 percentage point.

Fed policymakers in December anticipated three quarter-point rate reductions this year, on average. Since then, traders have begun weighing the possibility of that number going down. Strategists at Bank of America, for example, observed last week that changes by only two forecasters could move the median to rise by the same amount.

Atlanta Fed President Raphael Bostic said on Monday that an initial rate cut during the third quarter should probably be followed by a pause to assess its impact. 

The ADP employment change for February was 140,000 vs economists’ median estimate of 150,000. The JOLTS job openings gauge for January is estimated to have decelerated for the first time since October. 

The February employment report coming Friday is anticipated to show a 200,000 increase in nonfarm payrolls and a reversal of January’s increase in the pace of wage growth.

(Adds comments and context, updates yield levels.)

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