US Treasury yields climb as strong data sow doubt on Fed rate cuts

US government bonds slumped after strong September retail-sales figures fanned doubts over how quickly the Federal Reserve will continue to lower interest rates.
The selloff pushed Treasury yields higher by as much as seven to 10 basis points. Initially, short maturities led the move as traders trimmed bets that the US central bank will cut rates at its next several meetings, as most Wall Street banks have been predicting. Later, those yields retreated from session highs while 10- to 30-year rates continued to rise.
“The market has been looking for continuing weaker economic data, and it has not been a consistent theme,” said Tom di Galoma, head of fixed income at Curvature Securities. While a November rate cut remains likelier than not in his assessment, “that view is waning with many market participants.”
Swap contracts that aim to predict future Fed decisions priced in a total of about 41 basis points of easing over the November and December meetings, down from 45 basis points on Wednesday. The January contract has a cumulative 59 basis points of cuts priced in, showing some doubts about whether the Fed will lower rates at that meeting as well.
On Thursday, a government report showed that September retail sales rose more than estimated and August levels were revised higher. Weekly initial jobless claims also unexpectedly declined, further eroding bond-market confidence that the economy is on the cusp of slowing.
Long-maturity yields stabilised after a couple of large block trades in Treasury futures, involving the Ultra Bond contract, which tracks that segment of the market.
The trades were done at prices suggesting they were initiated by buyers drawn to lower prices. Late in New York, a large block trade in December futures consistent with a sale, pushed the ultra-bond contract to fresh session lows and also steepened the curve to a session peak.
The latest selloff in Treasuries leaves the market on course for its first monthly decline since April, as measured by a Bloomberg index.
“Higher long-term growth absent a recession would portend higher long-term yields,” said George Catrambone, head of fixed income at DWS Americas. “There’s also been some election noise of betting odds favouring a Trump victory and term premium slowly working its way back into the market to further support bear steepening.”
The US presidential election is less than three weeks away on November 5, and financial markets have reacted to predictions that Donald Trump will win based on his support for looser fiscal policy and steep tariffs that could widen the federal deficit and fuel inflation.
Elevated volatility is expected over the coming weeks as investors await the Treasury’s quarterly announcement of note and bond sales — which it has said are likely to be stable — on October 30, October jobs data on November 1 and the Fed’s November 7 policy decision.
As for election day, investors are primed for big swings in yields. The MOVE Index of expected Treasury market volatility jumped to 124 from 100 on October 7, the biggest one-day move since 2020, as Election Day moved into the 30-day window it captures.
Traders this week have been unwinding positions in Treasury futures, with exposure to both 5- and 10-year note contracts falling, a signal that traders are closing-out positions and reducing leverage.