A rally in short-dated Treasuries gathered pace Thursday after a raft of US economic data on balance favored wagers on as many as three Federal Reserve interest-rate cuts this year.
Yields across maturities declined, with those on two-year notes falling five basis points and most reaching the lowest level in more than a month. The rally lowered the expected yield for an auction of seven-year notes later in the session by about four basis points.
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As short-maturity yields more closely tied to the outlook for Fed policy declined more than longer-term ones, the widely-watched spread between the five- and 30-year points increased to more than 101 basis points for the first time since 2021. A steepening yield curve is generally associated with expectations for Fed rate cuts.
"Overall, the data was mixed enough that we suspect the modest bid in the front-end of the market will persist," wrote Ian Lyngen, head of US rates strategy at BMO Capital markets. "The biggest surprise was personal consumption."
The growth rate for personal spending during the first quarter — part of a revision to US first-quarter gross domestic product — was unexpectedly revised to 0.5% from 1.2%. While other economic data points released at the same time showed unexpected strength, traders continued to wager that the Fed will begin to cut rates in September, with two cuts fully priced in by year-end. A third quarter-point cut is about half priced in.
The gains in Treasuries added to a strong run for the market. Two-year yields are down about 20 basis points over the past week near 3.73%, a seven-week low. The auction of seven-year notes at 1 p.m. New York time saw its expected yield decline nearly to 4%. It briefly exceeded 4.20% last week.
Short-term yields were already lower before the economic data releases following a report in the Wall Street Journal suggesting President Donald Trump is considering naming a successor to Fed chief Jerome Powell as soon as September or October.
Investors and analysts reckon Powell's replacement will grant the president's demands that the Fed cut interest rates right away causing traders to price in faster and deeper cuts beginning around mid-2026, when Powell's term ends.
Wagers on lower interest rates weighed on the dollar, which weakened against all of its Group-of-10 peers. The Bloomberg's Dollar Spot Index slumped 0.5% to the lowest level in more than three years. Michael Pfister, an FX analyst at Commerzbank AG, says the euro could climb to $1.18 in the coming days if policymakers continue to price in earlier rate cuts.
Potential contenders to succeed Powell include former Fed Governor Kevin Warsh, current Fed Governor Christopher Waller, National Economic Council Director Kevin Hassett, former World Bank President David Malpass and US Treasury Secretary Scott Bessent, Bloomberg News has previously reported.
Last week, US rates traders amassed a record futures bet that whomever Trump appoints will lead the central bank to cut interest rates almost immediately.
In a Bloomberg Television interview, BlackRock Inc. portfolio manager Russell Brownback said the market would push back if the Fed's independence began to come into question.
"The markets would protest any kind of degradation of that independence very quickly," he said. "I believe in the sanctity of the institution."
