| Key Points: – Short-term Treasury yields fell under 4% as inflation cooled and GDP forecasts weakened, boosting rate-cut expectations. – Traders anticipate a July rate cut and over 60 basis points of relief by year-end, driving a strong February rally. – Softer data and policy shifts have investors prioritizing economic slowdown risks over inflation fears. |
A powerful rally in U.S. Treasuries has slashed short-term bond yields below 4% for the first time since October, sparked by cooling inflation and shaky economic growth signals. Investors are piling into bets that the Federal Reserve will soon lower interest rates, possibly as early as midyear, giving the bond market a jolt of momentum.
The rally gained steam on Friday as yields on two- and three-year Treasury notes dropped by up to six basis points. This followed a disappointing January personal spending report and a steep revision in the Atlanta Fed’s first-quarter GDP estimate, which nosedived to -1.5% from a prior 2.3%. Even the less volatile 10-year Treasury yield dipped to 4.22%, its lowest since December, signaling broad market confidence in a softer economic outlook.
This month, Treasuries are poised for their biggest gain since July, with a key bond index climbing 1.7% through Thursday. That’s the strongest yearly start since 2020, up 2.2% so far. Analysts attribute the surge to a wave of lackluster economic data over the past week, flipping the script on expectations that the Fed might hold rates steady indefinitely.
Market players are now anticipating a quarter-point rate cut by July, with over 60 basis points of easing baked in by December. The latest personal consumption expenditures data for January, showing inflation easing as expected, has fueled this shift. Investors see it as a green light for the Fed to pivot toward supporting growth rather than just wrestling price pressures.
Still, some warn it’s early days. The GDP snapshot won’t be finalized until late April, leaving room for surprises. For now, two-year yields sit below 4%, and 10-year yields hover under 4.24%. Experts say the rally’s staying power hinges on upcoming heavy-hitters like next week’s jobs report—if it flags a slowdown, the case for rate cuts strengthens.
A week ago, 10-year yields topped 4.5%, with fears of tariff-fueled inflation looming large. But recent tariff threats and talk of federal job cuts have shifted focus to growth risks instead. Investors are shedding bearish positions, and some are even betting yields could sink below 4% if hiring falters and unemployment climbs.
The Fed, meanwhile, is stuck in a tricky spot with inflation still above its 2% goal. If push comes to shove, many believe it’ll lean toward bolstering growth—a move the market’s already pricing in. As February closes, index fund buying could nudge yields lower still, amplifying the rally.
This swift turnaround underscores the bond market’s sensitivity to shifting winds. With jobs data on deck, all eyes are on whether this Treasury boom has legs.