Treasuries Suffer Large Two-Day Loss as Fed Message Sinks In

Treasuries are headed for their biggest two-day loss in months as strong economic data reinforced the message of Federal Reserve officials including Chair Jerome Powell that interest-rate cuts are unlikely to begin before May.

Yields climbed at least 10 basis points — the five-year as much as 15 basis points to a year-to-date high 4.13% — after the ISM gauge of service-sector activity for January exceeded economist estimates. Friday was the US bond market’s worst day in nearly a year, with two- and five-year yields rising more than than 15 basis points after strong January employment data dashed hopes for a speedy pivot toward easier monetary policy.

The yield increases since Thursday are the biggest over a two-day period in months, at least. For the benchmark 10-year note, higher by about 27 basis points, it’s the most since June 2022, when it became clear the Fed was on the brink of a faster pace of interest-rate hikes. Aimed to throttle inflation, those hikes brought the federal funds target range to a two-decade high that Fed officials have signaled is unlikely to be sustained this year, without committing to a timeline for lowering it.

The market-implied odds of a quarter-point cut in March dwindled to almost 10%. Powell, in an interview with CBS’s 60 Minutes which aired Sunday, reiterated his Jan. 31 comment that the Fed’s next policy meeting in March is probably too soon to cut rates. Minneapolis Fed President Neel Kashkari made similar comments Monday, and nine other central bank officials are slated to speak this week.

The ISM report — which included an unexpected jump in a gauge of prices paid by companies in the service sector for materials — “just further reinforced the message from Powell that it’s unlikely we’ll see a March rate cut,” said Ian Lyngen, head of interest-rate strategy at BMO Capital Markets. Anticipation of this week’s Treasury note and bond auctions over the next three days was putting additional upward pressure on yields, he said.

Monthly auctions of three- and 10-year notes and 30-year bonds totaling $121 billion are scheduled, and in the corporate bond market, Morgan Stanley led a slate of 10 offerings Monday to begin a week expected to bring $25 billion to $30 billion.