Market News

(Bloomberg) -- Treasury yields dropped to weekly lows Friday after weak January retail sales data prompted traders to restore bets that the Federal Reserve will cut interest rates by September.

The bond market rally erased any remaining losses from Wednesday, when hotter-than-expected consumer price data pushed the market’s pricing of a rate cut out to December. The price action extended the whipsawing pattern unfolding as Fed policymakers pursue non-inflationary growth. The post-CPI selloff was mostly reversed Thursday by benign producer price inflation readings, which feed into the Fed’s favored price gauge — the personal consumption expenditures price index.

The retail sales report “pours some cold water on expectations of accelerating growth activity,” said Gennadiy Goldberg, head of US interest rate strategy at TD Securities. “Alongside the better pass-through from PPI into PCE, the market is fairly encouraged that inflation and growth are not re-accelerating, which is why cut pricing for 2025 continues to rebound from recent lows.”

Yields declined by at least three basis points across maturities on Friday. That helped push 10-year yields down two basis points for the week to 4.48%, marking a fifth consecutive weekly decline, the longest falling streak since 2021. It peaked near 4.81% in mid-January, the highest level in more than a year.

Interest-rate swap contracts that predict Fed policy priced in about 37 basis points of easing by year-end versus 30 basis points on Thursday, with the first quarter-point fully priced in by September. Wall Street views on Fed policy remain deeply divided, with several major banks including Bank of America and Deutsche Bank predicting no action this year and several others, including Goldman Sachs and JPMorgan Chase, forecasting at least two quarter-point cuts.

US January retail sales fell the most in two years, widely missing economist estimates. However the month was marked by devastating wildfires in Los Angeles and severe winter weather in several states.

At the same time, bond investors are wrestling with the potential consequences of import tariffs that US President Donald Trump has repeatedly threatened but not imposed on goods from major US trading partners.

A Bank of America survey published Friday showed investors have turned less bearish on US bonds, with fewer expecting the 10-year yield to peak above 5% this year, while more see it dipping below 4%. But participants also indicated a sharp decrease in conviction, a reflection of the muddied macro outlook.

Government bonds have also outperformed with interest-rate swaps, pushing the 30-year swap spread to the widest in more than a year, amid expectations that potential banking deregulation would increase the capacity for banks to hold more Treasuries securities.

“Bonds have been all over the place,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “Investors are not convinced about what to do.”

--With assistance from Kristine Aquino.