U.S. government bonds took a hit after stronger-than-expected retail sales in September cast doubts on how soon the Federal Reserve will ease interest rates. The selloff pushed Treasury yields higher by as much as seven to 10 basis points, particularly affecting short-term maturities as traders adjusted their expectations for upcoming rate cuts.
Initially, the rise in yields was driven by short-term bonds as traders dialed back their bets that the Fed would lower rates at its next few meetings. However, later in the day, short-term yields retreated from their session highs while longer-term yields, particularly on 10- and 30-year Treasuries, continued to rise.
“The market has been looking for weaker economic data, but that hasn’t been consistent,” said Tom di Galoma, head of fixed income at Curvature Securities. While di Galoma still sees a rate cut in November as likely, he acknowledged that “many market participants are starting to doubt that outlook.”
Market sentiment shifted after a U.S. government report revealed that September retail sales rose more than anticipated, with August figures also revised upward. Additionally, initial jobless claims unexpectedly dropped, signaling a stronger labor market and undermining expectations that the economy was on the verge of slowing. These factors combined to weaken confidence in the bond market that the Federal Reserve would pursue a quick path toward rate cuts.
Swap contracts, which traders use to predict future Federal Reserve decisions, now show that the market is pricing in around 41 basis points of cuts over the November and December meetings, down from 45 basis points earlier in the week. The January contract reflects expectations of a cumulative 59 basis points of cuts, suggesting uncertainty about whether the Fed will reduce rates at that meeting as well.
The bond selloff was further exacerbated by large block trades in Treasury futures, particularly involving the Ultra Bond contract, which tracks longer maturities. Some of the trades were at prices suggesting buyers were drawn to lower bond prices, but late in the session, a large block trade in December futures led to fresh lows and steepened the yield curve further.
The ongoing selloff leaves Treasuries on track for their first monthly decline since April, according to a Bloomberg index. “Higher long-term growth absent a recession would portend higher long-term yields,” said George Catrambone, head of fixed income at DWS Americas, adding that rising odds of a Trump victory in the upcoming U.S. presidential election are adding to the pressure.
With the election less than three weeks away on November 5, market volatility is expected to remain elevated. The MOVE Index, which tracks Treasury market volatility, surged to 124 from 100 earlier in October, marking the largest one-day jump since 2020. Investors are bracing for further fluctuations in bond yields ahead of key events, including the Treasury’s quarterly bond sale announcement on October 30, October jobs data on November 1, and the Fed’s policy decision on November 7.
