Strong economic data and worries over sticky inflation are pushing investors to reassess how deeply the Federal Reserve will be able to cut interest rates this year, fueling weakness in the U.S. government bond market.
Notably, investors have become slightly less optimistic on rate cuts than the Fed itself, which projected to deliver three 25 basis point reductions this year. Fed Chairman Jerome Powell in a Wednesday speech maintained that rates will fall later this year, despite stronger-than-expected growth. The latest evidence of a robust economy came this week, when stronger-than-expected March manufacturing data was followed by solid U.S. job openings figures for February and other data pointing to labor market strength.
The Congressional Budget Office last month forecast U.S. public debt will climb to 166% of GDP in 2054 from 99% in 2024 - though their outlook has improved from forecasts made last June due to spending limits passed by Congress and stronger projected economic growth. That trade, however, is increasingly becoming a test of patience, and investors will be closely watching Friday’s employment and consumer price data next week to assess how sustainable the current selling pressure in bonds is.
Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research in New York, said she still believes there is an opportunity to add more duration, or interest rate exposure, if yields rise further.