Short-term U.S. Treasury bonds experienced a rebound after traders raised their expectations for interest rate cuts by the Federal Reserve due to concerns over President Donald Trump’s tariff plans and their impact on risk appetite. The yields on 10-year U.S. Treasury bonds fell by seven basis points to 4.33%, marking their lowest level in over two months. Financial markets are now pricing in two quarter-point rate cuts this year for the first time in four weeks.
Market conviction is growing regarding a slowdown in the U.S. economy and a return to interest rate cuts, as uncertainty surrounding President Trump’s economic policies affects corporate expectations and market performance, increasing concerns about economic stability in the United States. Additionally, recent economic data showed a decline in the U.S. services sector, which contracted for the first time in two years in February, prompting investors to increase their demand for short-term bond auctions on Monday.
Analysts note that these developments indicate negative signals for the U.S. economy. They stated: “If this situation persists and economic data continues to show months of weak performance, it could weaken the perception that the U.S. economy remains exceptional compared to other major economies worldwide.”
Financial swaps (such as interest rate swap contracts) now anticipate a 53 basis point cut from the Federal Reserve by the end of the year, compared to 48 basis points on Monday. Additionally, the yields on two-year U.S. Treasury bonds dropped by five basis points to 4.12%.
Looking ahead, attention is focused on a speech by Dallas Federal Reserve President Lorie Logan in London, where traders will closely watch for any signals regarding the Fed’s balance sheet strategy. Minutes from last month’s Federal Reserve meeting revealed discussions about slowing the balance sheet reduction process.
It is worth noting that balance sheet reduction involves decreasing liquidity in the economy by selling financial assets held by the Federal Reserve or not reinvesting funds received from interest on those assets. This process leads to higher interest rates and slower economic growth to curb inflation.
However, if the Federal Reserve decides to halt or slow down the balance sheet reduction process, it would mean maintaining greater liquidity in the economy, which could stimulate economic activity but also heighten the risk of inflation. As a result, traders are eagerly awaiting any clues in Lorie Logan’s upcoming speech regarding the potential pause or slowdown of this process.
