Treasurys advanced as U.S. economic data left intact expectations that the Federal Reserve will cut interest rates at least once in 2025.
The moves on Tuesday pushed yields lower by one to four basis points following mixed retail sales data for May and a solid auction of inflation-protected securities.
The two-year rate, most sensitive to Fed policy shifts, fell less than two basis points to 3.95%, while the 10-year yield fell four basis points to 4.41%.
With U.S. central bank officials convening for a two-day meeting in Washington, traders continued to wager on just shy of two quarter-point rate reductions this year — with the first move fully priced in for October.
The Fed is expected to hold rates steady in June and July, but may telegraph its intentions via revised economic and rate forecasts on Wednesday.
“While the Fed remains on hold, we believe this could be a good opportunity for investors to lock in relatively high yields in fixed income while they are still available,” said Harvey Bradley, co-head of global rates at Insight Investment.
A $23 billion reopening of five-year Treasury inflation protected securities was awarded at 1.650%, slightly lower than the indicated level before the 1 p.m. New York time bidding deadline. Demand for the sale was bolstered by a lower breakeven inflation rate and the recent surge in oil prices.
The U.S. Treasury market has risen 2.3% so far this year, according to a Bloomberg gauge. While yields on 10-year notes have whipsawed during this period on President Donald Trump’s evolving trade policies, they’re now down just 16 basis points so far in 2025.
The ongoing conflict in the Middle East in recent days has had a limited impact on the U.S. bond market — and the U.S. dollar — despite the U.S. assets’ status as a haven in times of uncertainty.
Instead, the focus remains on the Fed meeting this week. Investors and economists alike are keen for clues on what it will take to get policymakers to implement their next rate cut, especially given that the U.S. economy appears to be generally healthy, if slowly cooling.
The unemployment rate has held steady for three months even as job growth has slowed, and underlying inflation rose by less than expected in May for the fourth straight month.
On Tuesday, retail sales data showed U.S. retail sales fell by the most since the start of the year in May, suggesting new tariffs deterred consumers from spending, especially on cars.
However, a subset of sales that inform the government’s calculation of goods spending for gross domestic product increased 0.4% in May, supported by gains in sporting goods, furniture and apparel.
Section 899
Meanwhile, the Senate’s latest version of Trump’s tax-and-spending bill — released late on Monday — offered a tweaked version of a provision called Section 899 that is informally known as the “revenge tax.”
The levy was designed to counter several European countries, Canada, Australia and more nations from taxing U.S. firms in a way some lawmakers argue is discriminatory. The tax has sparked fears on Wall Street that it could make it much harder for foreign individuals and companies to invest in the U.S..
However, the new version of the section would delay that new tax until 2027 for calendar-year filers and raise it by 5 percentage points a year until it hits a 15% cap.
As Goldman Sachs & Co. chief U.S. political economist Alec Phillips pointed out in a note to clients, it also “makes a small technical change that should result in their exclusion from interest withholding along with corporate and individual holders of U.S. debt.”
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