US prices retreat after steep gains, but bias still for lower yields

NEW YORK: US Treasury prices fell on Friday, as investors cashed in on sharp gains the last two days that saw yields drop to multi-year lows in the wake of a Federal Reserve statement that flagged interest rate cuts this year.

US benchmark 10-year Treasury yields dropped on Thursday below 2% for the first time in more than 2-1/2 years, while 30-year yields plummeted to their lowest since October 2016. Yields on US 2-year notes slid as well to their weakest level since mid-November 2017.

A few analysts believe that as the market digested the Fed's decision and statement on Wednesday, some have pushed back on the overall market forecasts of three to four rate cuts.

"For some people, the Fed seems like it's not rushing to cut," said Stan Shipley, fixed-income strategist at Evercore ISI in New York.

"Expectations of a 50-basis-point cut or a June cut immediately were dashed last Wednesday. So if the Fed thinks it may go 75 basis points in the next six to nine months, people are thinking they may only go 50 basis points, so 25 and 25," he added.

BMO Capital Markets somewhat echoed Shipley's view. In Friday's research note it said: "The economy hasn't gone off the rails, but the conductors are getting a bit jittery."

That said, the market is still positioned for lower yields going forward, and analysts said it is not wise to bet against the Fed.

The Fed on Wednesday set the stage for interest rate cuts starting next month, saying it is ready to counter growing global and domestic economic risks amid rising trade tensions and weak inflation.

Fed officials, though, still projected the targeted overnight lending rate to remain in a range of 2.25% to 2.50% for the rest of this year.

In morning trading, US 10-year note yields rose to 2.059% from 2.0% late on Thursday.

"I don't think there's a lot of demand out there for a 10-year note at more than 2.0%," said Evercore's Shipley. "So people are starting to shorten their duration bets."

Yields on US 30-year bonds advanced to 2.565%, from 2.527% on Thursday.

At the short end of the curve, US 2-year yields were up at 1.796%, from Thursday's 1.728%.

Yields were little changed overall after the release of upbeat data on US existing home sales. US 10-year and 30-year yields did hit session highs shortly before the release of the housing data, and pared gains shortly after.

US existing home sales increased 2.5% to a seasonally adjusted annual rate of 5.34 million units last month. April's sales pace was revised slightly higher to 5.21 million from 5.19 million units.