Treasuries Hit by Second Week of Declines on Inflation Jitters

(Bloomberg) -- US Treasuries registered a second week of losses, with long bonds leading Friday’s slump as concerns about inflation re-emerged.

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Yields have risen across the curve since the start of the month, with the benchmark 10-year’s up nearly 20 basis over that period to settle at 4.42% on Friday afternoon in New York. The 30-year yield jumped nine basis points in the session.

While the Federal Reserve is expected to resume cutting interest rates later this year, investors have grown increasingly cautious over inflation due to President Donald Trump’s tariff threats and rising oil prices.

“The selloff seems to be largely inflation-concern driven,” said Molly Brooks, US rates strategist TD Securities. “We still think rates should move lower by the end of the year as we expect the Fed to react to growth concerns and cut in October.”

While government bonds posted their best first half in five years, they have seen big swings at times this year as Trump ramped up his threats on trading partners and amid concerns over increased fiscal spending. Trump this week said he would impose a 35% tariff on some Canadian goods and raised the prospect of increasing levies on most other countries.

Volatility in the Treasuries market, however, has dropped recently, with the ICE BofA MOVE Index, a measure of expected fluctuations in yields, falling to its lowest level since January 2022.

“Until you have a real catalyst — either a catalyst for economic growth higher or a catalyst towards recession —you’re going to live in a range of maybe 4.25% and 4.75% and that’s kind of where we are today,” said Mike Contopoulos, deputy chief investment officer at Richard Bernstein Advisors, on Bloomberg TV.

Government auctions of 10- and 30-year Treasuries were well received this week, easing some concerns on the outlook. Mohit Kumar, the chief European strategist at Jefferies International, wrote in a note that he’s still “staying away from the long end” in the US, Europe and the UK given fiscal concerns.

Rate Cuts

Interest-rate swaps imply the Fed will cut twice this year, but there are questions over whether that will begin in September or later. A cut in October is fully priced in.

This week, policymaker Mary Daly reiterated that she expects to see two interest rate cuts this year, while Governor Christopher Waller repeated that he thinks the federal funds rate is too restrictive and that policymakers should consider cutting at this month’s meeting.

Chicago Fed President Austan Goolsbee on Friday told the Wall Street Journal that new tariffs have further clouded the outlook on inflation.

Strategists at RBC Capital Markets on Friday pushed back their forecast for first cut to December from September, saying policymakers need more time to assess inflation and labor market conditions.

“’Wait-and-see’ mode is only going to be broken by some evidence that tariff-related inflation has topped out and remains relatively contained, and some further softening in labor markets,” Blake Gwinn, head of of US rates strategy at RBC and his colleague Izaac Brook, wrote in a note. “Neither one of these is likely to be enough on its own.”

Also on Friday, the Treasury Department’s quarterly survey of primary dealers asked for their views on potential enhancements to the buyback program. The department said in May’s refunding that it was evaluating a broad range of possible changes.

--With assistance from Alice Gledhill, Anya Andrianova and Natasha Doff.

(Adds strategist comment in 13th paragraph.)

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