Treasuries soared and traders added to bets on a September interest-rate cut after Federal Reserve Chair Jerome Powell indicated a reduction may be warranted to support the labor market.
Yields tumbled across tenors with the two-year notes’ — which are more sensitive to changes in monetary policy — declining as much as 10 basis points, while the benchmark 10 year’s fell to 4.25%, the lowest level in a week. Traders boosted wagers on a quarter-point cut next month, pricing in a roughly 85% chance of a move, up from around 65% before Powell spoke.
In remarks prepared for the Fed’s annual conference in Jackson Hole, Wyoming on Friday Powell said, “the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance.”
Powell’s remarks sound “slightly more dovish by suggesting a shifting of risks towards the weakness in the labour market and away from the stickiness of the US inflation,” said Valentin Marinov, head of G-10 FX research and strategy at Credit Agricole. “His comments further seem to prepare the ground for a September cut.”
Faced with weeks of mixed economic data and hawkish comments from other Fed officials, bond investors were pinning their hopes on Powell solidifying their bets on a cut next month.
Interest-rate swaps tied to Fed meetings show policymakers now cutting twice before the end of the year. The central bank has been on hold at a range of 4.25% to 4.5% since December.
The greenback slumped to a session low against a basket of peers, with the Bloomberg Dollar Spot Index falling 0.6%.
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