US bonds weaken on uncertain rate outlook

By Gertrude Chavez-Dreyfuss

U.S. Treasuries fell on Thursday, pushing yields higher, as investors scaled back expectations for imminent rate cuts amid lingering uncertainty over the inflation outlook and stark divisions among Federal Reserve policymakers on the trajectory of the economy and monetary policy.

The U.S. government reopened after a record 43-day shutdown, easing some of the uncertainty that had weighed on economic sentiment. The resolution removes a key source of disruption, though the bond market remained focused on broader fiscal and monetary challenges ahead.

In morning trading, the benchmark 10-year Treasury yield was up 2.3 basis points at 4.101% US10Y, while U.S. 30-year bond yields rose 2.4 bps to 4.686% (US30YT=RR).

On the shorter end of the curve, the two-year yield, which reflects interest rate expectations, advanced 2.3 bps to 3.589% (US2YT=RR).

BESSENT MOVES TO LOWER PRICES

"Inflation has been persistent and we had some interesting comments from (Treasury Secretary Scott) Bessent backing off on some food tariffs. I think that's, quite frankly, an acknowledgement that they have been wrong on tariffs," said George Cipolloni, portfolio manager at Penn Mutual Asset Management in Philadelphia.

Bessent on Wednesday said Americans would see "substantial announcements" in the coming days aimed at lowering the prices of products such as coffee, bananas and other items not grown in the United States.

"We are definitely seeing weakness in the labor market: that's clear, but we're just not getting enough relief on the inflation side. So the Fed is kind of stuck. I would be surprised if they didn't cut at least one more time by 25 basis points ... but at the end of the day, the big issue is the lack of a resolution on inflation and cost," Cipolloni added.

In the absence of data, bond investors have focused on comments from Fed officials.

A growing number of Fed policymakers in recent days have signaled hesitation on further easing, helping push financial market-based odds of a reduction in borrowing costs in December to near even. Fed officials who spoke recently cited worries about inflation and signs of relative stability in the labor market after two U.S. interest rate cuts this year.

Later on Thursday, the U.S. Treasury will sell $25 billion in 30-year bonds, and expectations are mixed. BMO analysts noted that every 30-year refunding auction in 2025 has underperformed, meaning the price was higher than expected by about 1.3 bps.

"Fundamentally, the Treasury Department's signaling that nominal coupon auction sizes won't be increasing until FY27 (fiscal year 2027) should support the bond auction," BMO wrote in a research note.