(Bloomberg) -- Treasuries rallied after Federal Reserve Chair Jerome Powell said an interest-rate cut may come as soon as September. The advance capped a third straight month of gains that marked the longest winning streak for US bonds in three years.
Yields tumbled some 10 basis points or more across the curve on Wednesday after the Fed chief said the time was coming for the central bank to start lowering borrowing costs, with the move gaining pace later in the day as Mideast tensions stoked some flight-to-safety buying. US two-year yields slid to the lowest since February, while traders priced a minimum of two rate cuts this year starting at the next meeting.
Even as Fed officials left their target rate in a range of 5.25% to 5.5% as expected, bond investors were heartened by Powell’s remarks that data is moving in the right direction for easier monetary policy. His comments put Friday’s monthly jobs report squarely in focus, with investors keen to see further evidence of a cooling labor market that would help central bankers build the case for a rate cut soon.
“The market has priced in quite a lot of easing — the pressure is for data to validate that,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle. “The pressure is for the Fed to change the strategy.”
Interest-rate swaps showed traders are still fully priced in a quarter point cut in September — and a total of almost 70 basis points worth of reductions for the year.
“The committee is not ready to fully commit to a September cut,” said Leah Traub, portfolio manager at Lord Abbett & Co. “So they are not going to promise one. But they are clearly still moving closer to a cut, and I think September is fully on the table.”
In its statement, officials said the Fed is “attentive to the risks to both sides of its dual mandate” — price stability and full employment — adding that the central bank doesn’t expect to cut rates “until it has gained greater confidence that inflation is moving sustainably toward 2%.”
That casts a spotlight on the raft of data expected between now and September, starting with the US labor report. Next month’s central bank symposium in Jackson Hole, Wyoming, will also provide an opportunity for Powell to fine-tune his message to the market on monetary policy.
Former New York Fed President Bill Dudley told Bloomberg TV on Wednesday that he expects central bankers will have enough confidence by September to vote unanimously on a quarter-point rate cut.
Already, 10-year yields have declined about 36 basis points this month, marking the biggest decline this year. The Bloomberg’s benchmark for Treasuries returned 1.7% in July, turning a loss to a 0.8% gain for the year.
Earlier on Wednesday, a private payroll report showed the US added the fewest number of workers since the start of the year. A separate government report showed a broad gauge of US labor costs increased less than forecast in the second quarter.
Also on Wednesday, the US government left its quarterly sales of longer-term debt unchanged for the second straight time and said it plans to hold the issuance steady for “several quarters.” The result was widely anticipated by primary dealers.
In the currency market, the Fed announcement amplified the impact of the Bank of Japan’s own hawkish meeting earlier in the session. The yen earlier rose to its strongest level since March while a Bloomberg gauge of the dollar fell as much as 0.6%, the sharpest retreat in nearly three weeks, to session lows as Powell spoke.
--With assistance from Edward Bolingbroke and Liz Capo McCormick.
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