Fed Rate Cuts Boost Treasuries, Economic Resilience and Positive News

US Treasuries rose to their second gain of the year in May, marking a cooling job market and easing inflation pressures. This was driven by the bond market’s eagerness for positive news and its search for a reason to rally. The Fed has indicated that the pace of rate cuts will be based on economic figures, with expectations of showing resilience in the world’s largest economy.

According to Richard McGuire, head of rates strategy at Rabobank, pricing for Fed rate cuts is becoming more positive, which is helping Treasuries to extend gains from the previous week. Yields on 10-year Treasuries fell for a third consecutive day, reaching the lowest level since May 28. European bonds also saw gains as the region’s manufacturing PMI data was slightly below expectations.

Michael Kushma, CIO Global Fixed Income at Morgan Stanley Investment Management, noted that markets are closely monitoring each data point as the Fed has indicated that it will cut rates if economic indicators show weakness. The highlight of the week will be US data on May payrolls due on Friday, leading up to the Fed’s policy meeting on June 12. Market indicators show a strong likelihood of a rate cut in December, with increasing odds of a move as soon as September. Overall, there is an implied total of 36 basis points of rate reductions through year-end.