Weak economic data drives the rise of U.S. Treasuries as the market bets on two rate cuts by the Federal Reserve this year

U.S. Treasury bonds rose as the latest batch of economic data showed a slowdown in economic activity and cooling inflation, supporting expectations that the Federal Reserve will cut interest rates twice this year. The bond rally on Thursday pushed yields on two-year to ten-year Treasury bonds down by 10 basis points or more.

After several large transactions, yields on longer-term Treasury bonds also retreated from near 5% levels. Swap contract traders expect a rate cut of about 55 basis points for the remainder of 2025. The dollar fell.

Earlier this week, Wall Street strategists, including JP Morgan, raised their yield forecasts as these firms delayed expectations for when the Federal Reserve would resume easing policies.

Zachary Griffiths, head of investment-grade and macroeconomic strategy at CreditSights Inc., stated, "Bad news is good news for the bond market," as Thursday's data—including producer prices and retail sales—pointed to economic weakness.

U.S. producer prices unexpectedly fell in April, marking the largest decline in five years, indicating that businesses are absorbing some of the impacts from tariffs. Meanwhile, U.S. retail sales growth significantly slowed as consumers reduced spending on imported goods due to concerns over rising prices from tariffs.

The two-year Treasury yield, which is most sensitive to Federal Reserve policy, fell by 10 basis points to 3.95%, while the benchmark ten-year Treasury yield dropped by about 10 basis points to 4.43%. Due to concerns over the U.S. fiscal trajectory, investors are becoming increasingly cautious about purchasing long-term securities, with the 30-year Treasury yield experiencing a slightly smaller decline.

While swap contract traders have fully priced in expectations for a rate cut in October, there are also high expectations for a rate cut in September. This is earlier than some Wall Street economists had anticipated, as these economists delayed their forecasts for the next rate cut following a recent easing of U.S.-China trade tensions.

The interest rate strategy teams at TD Securities, JP Morgan, and Bank of America have recently raised their forecasts for U.S. Treasury yields.

Meanwhile, a massive tax cut proposal from Republican lawmakers has been advancing, raising new concerns about the U.S. fiscal trajectory, as the plan is expected to exacerbate the federal deficit and increase the government's debt burden.

JP Morgan CEO Jamie Dimon stated in an interview on Thursday that the U.S. deficit and debt burden are a concern.

Dimon said at JP Morgan's annual global markets conference in Paris, "This, in my view, brings inflation risks and the risk of rising long-term rates." He added that this could slow growth and create a stagflation scenario.

Given that U.S. debt management agencies have increased the issuance of Treasury bills in recent years, rising short-term yields could pose a threat to fiscal prospects. According to the Peterson Foundation, at least $9.3 trillion of federal debt will mature and need to be rolled over within a year—additionally, the U.S. Treasury will need to issue about $2 trillion next year to cover the federal deficit Traders this week received signals from Federal Reserve policymakers, feeling reassured about maintaining interest rates steady while awaiting clearer information on how government trade policies will impact economic growth and inflation. Last week, the Federal Reserve chose to keep interest rates stable while waiting for further evidence regarding the strength of the economy.

David Berson, Chief U.S. Economist at Cumberland Advisors, stated, "If these trends continue, weak consumer spending and declining inflation may provide some room for the Federal Reserve to ease policy later this year."

Federal Reserve Chairman Jerome Powell did not provide insights into the recent outlook for monetary policy during his prepared remarks on the assessment of the Federal Reserve's framework on Thursday