Bond traders priced in less monetary-policy easing by the Federal Reserve this year — and briefly set the odds of a first move in June below 50% — after a gauge of US manufacturing activity showed expansion for the first time since 2022.
The amount of Fed rate cuts priced into swap contracts for this year dropped to fewer than 65 basis points — less than Fed policymakers themselves have forecast — after a report on ISM manufacturing for March exceeded all estimates in Bloomberg’s survey of economists. A bond-market decline lifted two- to 30-year Treasury yields roughly 10 or more basis points on the day, among their biggest daily increases this year.
The selloff was already under way before the ISM data release as traders reassessed the outlook for monetary policy based on economic figures and cautious comments by Fed Chair Jerome Powell on Friday, when US markets were closed.
The ISM report “feeds into the narrative coming out of last week,” whereby the economy’s resilience enables the Fed “to be patient,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. For the bond market, that means rates stay “higher for longer.”
Personal income and spending data for February released Friday showing that consumption remains strong while progress toward lower inflation has stalled. Subsequently, Powell reiterated that the Fed wants to be more confident in the inflation trend before cutting rates, and that strong labor-market conditions mean there’s no urgency.
