Treasuries Dip Before PCE as Fed Hawks, Iran Put Traders on Edge

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Treasuries Dip Before PCE as Fed Hawks, Iran Put Traders on Edge.

treasuries & bonds :: 13hrs ago :: source - bloomberg

By Alice Atkins

(Bloomberg) -- Treasuries fell as investors braced for key US inflation data, capping a week shaped by hawkish signals from the Federal Reserve and tensions between the US and Iran that sent oil prices higher.

Yields on two-year bonds — more sensitive to changes in monetary policy — rose two basis points to 3.47%, while those on the 10-year ticked one basis point higher to 4.07%.

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The small moves suggest traders are reluctant to make large bets ahead of the release of PCE data — the Federal Reserve’s preferred inflation gauge — as well as fourth-quarter numbers for gross domestic product.

After Fed minutes showed officials remain wary about declaring victory over inflation, anything in Friday’s data suggesting sticky price pressure or a resilient economy could prompt traders to question the two quarter-point interest-rate cuts priced for this year.

That would clash with the “golidlocks” picture of “virtually no inflation, and extraordinarily high economic growth” that US President Donald Trump has been painting, said Christoph Rieger, head of rates and credit research at Commerzbank AG. “FOMC minutes raised the market’s macro sensitivity,” he said.

There’s concern policymakers may keep rates higher for longer — or even hike — if price pressures remain stubborn. Portfolio managers at Invesco Ltd. and Carmignac are betting against US bonds, citing economic resilience that may not lead to interest rate cuts.

Meanwhile, escalating tensions tied to Iran and oil prices add a layer of uncertainty and challenge the disinflation narrative. Brent crude held near the highest level in six months on Friday as Trump ramped up pressure on Tehran to strike a deal over its nuclear program.

Other investors say the current uncertainty encourages range-bound trading rather than big conviction wagers, with money managers including Vanguard Asset Management Ltd cautious about pushing US yields decisively higher or lower. A $9 billion auction of 30-year Treasury Inflation-Protected Securities saw strong demand on Thursday.

“We think the 10-year point will struggle to break below 4%, but once you go north of 4.25%, there’s plenty of buyers,” said Ales Koutny, head of international rates at Vanguard. “We have been trading ranges quite successfully on that, but right now we have gone to the lower end, so I prefer to be a bit underweight.”