Yields slip as investors digest Fed cut and Trump’s triumph

New York — US Treasury yields eased early on Friday in the wake of the Federal Reserve’s quarter point easing on Thursday, while profit taking on “Trump trade” bets leading up to Tuesday’s decisive victory for the former president put a bid under US government debt.

For the week, 10-year yields were heading towards a slight loss, while the two-year yield held steady after consecutive increases across much of the curve since September. The yield on the benchmark US 10-year note was off 3.5 basis points from late Thursday at 4.308%.

The scale of Republican Donald Trump’s win over Democratic rival Kamala Harris surprised markets, given how close opinion polls had put the two going into the election.

Nevertheless, markets had been selling bonds and pushing yields higher in preparation for a budget blowout and higher inflation under Trump, given his campaign pledges to lower taxes, and increase tariffs.

The Republican capture of the Senate and the narrow edge the party has in retaining control of the House — where counting is still under way for some seats — makes it likely that much of Trump’s agenda will pass easily.

Still, on Thursday the Fed gave markets a chance to take some profits, when it lowered its fed funds target rate to 4.50%-4.75%, as expected. With inflation coming down and signs of labour market loosening, the central bank eased by an aggressive 50 basis points in September after holding rates at 5.25-5.50% since July 2023.

Policymakers are preparing for what could be a more complex economic picture after Trump takes office in January.

Kim Rupert, MD of fixed income at Action Economics in San Francisco, said Treasuries were digesting recent movements and trying to find a course from here.

“The Trump trade has been a big factor,” she said. “The Fed really didn’t tell us much yesterday. It wasn’t expected to. So now we’re going to have to hang around these levels to try to figure out the path ahead, but that’s going to require more data.”

The political blowout and monetary policy decision aside, it was an uneventful week data-wise. The University of Michigan preliminary consumer sentiment survey comes later Friday morning. Markets are watching for the October Consumer Price Index report on Wednesday, followed by producer prices on Thursday.

Fed funds futures traders are pricing in an 87% probability that the Fed will lower rates another 25bp in December.

The two-year note yield, which typically moves in step with interest rate expectations, was 0.4bp lower at 4.216%.

The 30-year bond yield fell 4.4 basis points to 4.5% from 4.544%.

The closely watched gap between yields on two- and 10-year Treasury notes, considered a gauge of growth expectations, was at a positive 9.0 basis points, flatter than 12.2bp late Thursday.

The implied break even inflation rate on 10-year Treasury Inflation Protected Securities (TIPS) fell to 2.3565% from 2.37% late Thursday.

The five-year TIPS break even inflation rate fell to 1.9185%, showing that investors think annual inflation will average below the Fed’s 2% target rate for the next five years.

Reuters