(Bloomberg) — US Treasuries closed out a third-straight positive week in a rally fueled by bets the Federal Reserve is ramping up to cut rates at least twice this year.
The Bloomberg US Treasury index posted a 0.8% return for the week in its best run since early April. It’s now on track for its biggest monthly gain since February.
The advance has been driven by several economic data points that reinforced rate-cut wagers and by speculation President Donald Trump will name a more dovish Fed chief. Fed officials Christopher Waller and Michelle Bowman have also signaled in recent days they’d be open to lowering rates as soon as the next meeting.
“The market really got excited on the Fed dove narrative,” said Gregory Peters, co-chief investment officer at PGIM Fixed Income. That now “puts data more at the fore.”
The gains for the week came even after the bonds slipped on Friday. Yields on maturities across the curve rose following the release of economic data that pointed to firmer-than-expected inflation.
“The market overshot a bit based on Waller and Bowman language and now we’re taking some of this risk off into the weekend,” said Ed Al-Hussainy, rates strategist at Columbia Threadneedle Investment.
A Bloomberg gauge of the dollar separately rallied to the day’s high on Friday after Trump said he would be cutting off all trade talks with Canada and threatened to impose a new tariff rate. Canadian government debt jumped on the news, outpacing developed market peers.
The market could well find further support from supply-and-demand factors including Monday’s month-end index rebalancing, which has the potential to drive buying, and from a gap in the coupon auction calendar until July 8.
Read: Jim Millstein Says US Risks ‘Fiscal Disaster’ If Recession Hits
Traders are also fully pricing in two rate cuts this year, with the first coming in September. They currently see a less than one in five chance of a July rate cut, but will focus on plenty of fresh data next week, topped by the June employment report.
That data is released Thursday ahead of the July 4 holiday. Job creation is forecast to ease to 120,000, down from 139,000 the prior month, according to economists surveyed by Bloomberg. The unemployment rate is seen nudging up to 4.3%, and while still contained, such an reading would mark a fresh peak since 2021.
“There is a little bit of optimism that rate cuts are coming, most of that is driven by governors Waller and Bowman basically referencing that July is in play,” Gennadiy Goldberg, head of US rates strategy at TD Securities told Bloomberg TV. He said the rest of the FOMC was split in two camps calling for either two or no rate cuts this year. TD expects the next rate cut to arrive in October as by that stage, the Fed will have enough data on inflation and the jobs market.
“It is going to be a drift lower in rates, and that’s why our year-end forecast for 10-years is 4%,” he said.
Other tailwinds to Treasuries include proposed US changes to a key capital buffer, which Powell said should bolster banks’ roles as intermediaries in the market. Meanwhile, the removal of the Section 899 “revenge tax” proposal that had been worrying Wall Street had little market impact, though it could improve sentiment toward US assets at the margin.
Traders are also monitoring Trump’s proposed ‘big beautiful bill,’ which is nearing a vote in the Senate. It has fueled concerns surrounding the US fiscal deficit, weighing on longer-maturity Treasuries.
Wells Fargo strategists see the potential for the spread between 10-year and 30-year yields to widen to 75 basis points by end-2025, in what they describe as a “fiscal blowout” scenario. The difference in yields is currently around 55 basis points.
“We expect very long duration bonds to continue lagging their five- and 10-year counterparts,” a team led by Michael Schumacher wrote in a note. “The significant relative rise in 30-year yields is due to investor concerns about potential supply.”
(Recasts with weekly performance.)
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