(Bloomberg) — Investors flocked to US government bonds Thursday as ebbing expectations for American economic growth weighed on stocks.
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The rally averted a third straight daily loss that had appeared likely as 10- and 30-year yields reached their highest levels so far this month. Bond investors this week have mostly ignored US economic data showing slower inflation, viewing it as temporary because of the Trump administration’s trade policy.
“Treasuries have done a nice job buffering against drawdowns in equities,” Ed Al-Hussainy, global rates strategist at Columbia Threadneedle Investments. “That’s a really good sign for investors. It’s a sign diversifying out of stocks to Treasuries is still working. That’s a big deal.”
Expectations that the unfolding trade war also may dent the US economy have sent US equity benchmarks to six-month lows and stoked demand for bonds. Economists at Barclays Plc on Thursday lowered their forecast for US GDP this year and predicted two Federal Reserve interest-rate cuts this year versus one previously, even as they also see tariffs boosting inflation.
Treasury yields moved even lower beginning in the early New York afternoon session as major US equity benchmarks slumped. The 10-year yield fell about five basis points to 4.26% after rising in the morning to as high as 4.35%.
Earlier Thursday, Treasuries failed to sustain a positive reaction to data showing US wholesale inflation stagnated in February, helped by a decline in services costs. The producer price index was unchanged from January and up 3.2% compared with a year earlier.
The ongoing tariff threats are “stoking concerns about future inflation and renewed potential for higher policy rates for longer,” said Zachary Griffiths, head of investment-grade and macroeconomic strategy at CreditSights. “It will all come down to either affirmation of a slowing economy or data to the contrary to determine if the 10-year yield breaks sustainably below 4.25% — or if the new range is about 4.25% to 4.75% for now.”
Swaps traders expect the Fed will reduce interest rates this year by around 66 basis points. That implies at least two quarter-point rate cuts, with the first fully priced in by July.
The market’s recovery trimmed the expected yield for an auction of 30-year Treasury bonds at 1 p.m. New York time. Despite tepid demand metrics for the auction, yields subsequently declined further along with equity benchmarks.
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