US Bonds Slip Again as Traders Price In Gradual Fed Rate Cuts

The rout in US government debt extended slightly on Tuesday, with longer-dated yields at the highest levels since late July and inflation data later in the week expected to enable Federal Reserve interest-rate cuts.

While most yields were slightly higher on the day, short maturities most sensitive to changes in Fed policy were little changed as bets on additional rate cuts stabilized after a hawkish repricing in recent days. Earlier, the two-year yield fell as much as six basis points to 3.94%. Ten- and 30-year yields rose by less than three basis points to the highest levels since July 31.

Strong jobs data at the end of last week shocked traders betting on another big cut from the Fed this year and revived concern inflation could reignite. Now investors are looking ahead to Thursday’s consumer prices data, which are expected to show deceleration.

“Rates investors do believe a more proactive Fed today means a better economy tomorrow,” warranting higher long-term yields, Mark Cabana, head of US rates strategy at Bank of America, told Bloomberg Television. Still, a 10-year yield in the 4% to 4.25% range presents a buying opportunity as the Fed “is almost certainly going to cut to 4% regardless of the data.”

In the meantime though, the Treasury Department’s auctions of three- and 10-year notes and 30-year bonds from Tuesday to Thursday may render investors cautious. The $58 billion three-year auction at 1 p.m. New York time is poised to draw a yield near 3.90%, higher than the last two monthly sales of the tenor.

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