US Treasuries Slip as Traders Trim Rate-Cut Bets Ahead of Powell

Michael McKee, International Economics & Policy correspondent from Bloomberg News, joins from Jackson Hole to discuss what investors should be listening for in Fed Chair Powell's speech on Friday.

US Treasuries snapped two days of gains as traders pared bets on a September interest-rate cut ahead of the Federal Reserve’s gathering at Jackson Hole.

The yield on the 10-year benchmark rose by three basis points to 4.32%. The two-year yield — which is more sensitive to changes in monetary policy — was two basis point higher at 3.77% Thursday morning in New York.

While Jackson Hole — and particularly the speech from Fed Chair Jerome Powell on Friday — is the week’s main event, traders were watching a slew of data on Thursday. Weekly jobless claims showed a bigger-than-expected increase in new filings while a separate report suggested manufacturing is expanding at the fastest rate in more than three years.

Read more: US Manufacturing Expands at Fastest Pace Since 2022 on Demand

At Jackson Hole, “Powell may still guide toward cuts while sounding hawkish,” said Colin Graham, head of multi asset strategies at Robeco, in an interview. “We think the market is mispricing the probability of a cut.”

Interest-rate swaps show about a 70% chance of a quarter-point reduction at the Fed’s meeting in mid-September. A week ago the odds were above 90%.

Investors will be monitoring Powell’s speech for evidence that could reinforce — or undo —those wagers. Some have even pushed into wagers that benefit from an outsize, 50-basis-point cut.

“The state of the US labor market is closely watched by the Federal Reserve, and by global markets,” said James Bilson, a fixed income strategist at Schroders. The firm thinks the chance of a so-called hard landing has increased to about 20%.

“We don’t see justification for a larger 50 basis points cut in September, but there is now scope for the Fed to reduce rates more quickly than they might have otherwise,” he added.

A strong reading on US manufacturing in the run-up to Jerome Powell’s speech spurred a slide in bonds on concern about sustained price pressures that could dim the outlook for Federal Reserve interest-rate cuts.

The fastest growth in manufacturing since 2022 drove Treasuries down across the curve, with 10-year yields rising three basis points to 4.32%. The S&P 500 fell for a fifth straight day, but traded away from session lows amid gains in some megacaps. Walmart Inc.’s profit miss overshadowed a better outlook from the world’s largest retailer.

The Fed is getting ready to kick off its economic symposium in Jackson Hole, the central bank’s flagship event. Central bankers and economists from around the world are on their way to the gathering, which will focus on structural changes in the labor market. Chair Jerome Powell will speak Friday.

“On the eve of Jerome Powell’s closely watched commentary in Jackson Hole, investors are looking for assurance from Powell that a rate cut is likely at the September meeting, in order to help prevent any further weakening of the labor market,” said Rick Gardner at RGA Investments.

That would be the Fed’s first reduction this year. A week ago, that outcome was seen as all but guaranteed, but conviction has faded and it’s now priced at a 70% likelihood.

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