Traders reduce interest rate cut bets as U.S. Treasury yields rise ahead of Federal Reserve rate decision
Before the Federal Reserve's interest rate decision, U.S. Treasury yields rose as economic data showed resilience, leading investors to reduce bets on rate cuts. The yield on the two-year U.S. Treasury rose to 3.82%, with expectations of about three rate cuts in 2025. The market is focused on comments from Federal Reserve Chairman Jerome Powell to gauge the likelihood of policy easing. Despite a decline in consumer confidence, non-farm payroll data exceeded expectations, leaving the market divided on the future economic outlook
According to Zhitong Finance APP, U.S. Treasury bonds fell ahead of the Federal Reserve's interest rate decision, as investors bet that the pace of monetary easing will slow in the face of data showing economic resilience.
The yield on the two-year U.S. Treasury rose 4 basis points to 3.82%, as traders reduced bets on interest rate cuts, now expecting about three cuts starting in July 2025, each by 25 basis points. Pricing on Thursday indicated a potential one percentage point cut starting in June this year—but only before stronger-than-expected U.S. economic data prompted a significant reassessment.
The Federal Reserve is expected to keep the benchmark interest rate unchanged at 4.25%-4.50% on Wednesday, with traders closely monitoring comments from Fed Chairman Jerome Powell to understand officials' interpretations of recent data and whether President Donald Trump's economic policies have prompted any changes in their views on when to ease policies.
This is because tariffs on imported goods have weakened consumer confidence and may also exacerbate price pressures.
"This meeting may have a greater impact on expectations than usual, as it is the first interest rate decision following the mutual tariff announcement," said Eric Lim, interest rate strategist at Deutsche Bank. "Verbal guidance will be key, as the market has already delayed expectations for monetary easing," he added.
For investors, the question is how to weigh the economic pessimism seen in some recent surveys against the resilience shown by top indicators like employment. While U.S. consumer confidence fell to a near five-year low in April, non-farm payrolls exceeded all forecasts compiled by Bloomberg.
Open interest data showed that after the employment data was released on Friday, there was deleveraging and position closing at the front end of the curve, consistent with the liquidation of long positions. Tuesday's JP Morgan Treasury client survey indicated that neutral positions remain high, close to annual highs.
"In my view, it is still difficult to make a particularly high-confidence judgment on U.S. Treasuries at this time," said Michael Brown, a strategist at Pepperstone. "As for the macro impact of tariffs, it remains to be seen which side bond market participants will ultimately take, as the risks of growth downturn and inflation uptick are almost equally prevalent."
