Short-Dated Treasuries Fall as Strong US Data Dents Rate Bets

Short-maturity Treasuries fell slightly after strong US economic growth and employment data made a small dent in the market’s conviction the Federal Reserve will cut interest rates twice by year-end.

Yields on two- to five-year notes rose at least two basis points to session highs after the US economy’s second-quarter growth rate was revised to 3.3% from 3%, exceeding economist expectations. At the same time, weekly jobless claims data showed a bigger-than-anticipated decline in new claims, a sign of labor-market strength.

“The data continues to point to a resilient consumer despite tariff uncertainties,” said Subadra Rajappa, head of US rates strategy at Societe Generale.

Treasuries maturing in the next few years are feeling the “pull and push” of whether the Fed should cut in September, Rajappa said. Although Fed Chair Jerome Powell “is tilting toward a more dovish stance, the data continues to push back on the need for cuts,” she added.

Shorter-maturity US yields remain near the lowest levels of the past month following a rally fueled by rising expectations for Fed rate cuts. Those on two-year notes created via an auction this week ended Wednesday near 3.61%, the lowest level since May 1. They rose to 3.64% after Thursday’s economic data.

The revisions to second-quarter growth, however, “do not change the story that underlying demand is slowing outside of a few specific parts of the economy,” and underlying growth should “slow further as the labor market weakens and tariff costs increasingly weigh on activity,” economists at Citigroup Inc. said in an analysis.

Swap contracts linked to future Fed rate decisions continue to fully price in one quarter-point rate cut this year in October and a second one by year-end. About 20 basis points of easing are priced in for September, up from about 10 basis points at the end of July.

Rate-cut expectations surged in response to weak employment data released Aug. 1, and have been bolstered by US President Donald Trump’s efforts to install new Fed governors in pursuit of faster interest-rate cuts. His appointee to serve out a governor’s term expiring in January is likely to be confirmed before the September policy meeting, Bloomberg News reported.

Long-maturity Treasury yields remained slightly lower on the day, while intermediate sectors were little changed ahead of an auction of seven-year notes at 1 p.m. New York time. The $44 billion auction is still projected to draw the lowest yield for the tenor since September 2024.

Response to Auctions

Sales of two- and five-year notes over the past two days drew the lowest yields since then, and the new issues rallied from those levels. The two-year note auction was awarded at 3.641%, the five-year at 3.724%. The seven-year notes being sold Thursday were near 3.94% in pre-auction trading. Monthly auctions of the tenor have drawn yields higher than 4% since October.

Yield declines since last month’s seven-year auction left the sector overvalued, which may impair the auction, interest-rate strategists at JPMorgan Chase & Co. led by Jay Barry said in research published late Wednesday.

Recent seven-year auctions have fared well, however, with last month’s drawing a yield nearly three basis points lower than the indicated level at the bidding deadline, among the strongest results of the past five years.

The seven-year is the last coupon auction each month, and bond-index rebalancing on the last business day of the month creates demand for bonds entering the benchmarks from index funds and other passive investors. While dealers prepare for the event, limiting its market impact in many cases, the biggest rebalancings are on the last trading days of August, November, February and May, when the largest amounts of new Treasury debt are sold.

After the seven-year, there are no Treasury coupon auctions until Sept. 9. However a seasonal surge in US investment-grade corporate new issues is expected next week.

This article was generated from an automated news agency feed without modifications to text.

Catch all the Business News , Market News , Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.

Download the Mint app and read premium stories