US Treasury debt prices gained on Friday after a report showed consumer sentiment softening, bolstering expectations the Federal Reserve will not raise interest rates in September.
This week, Treasuries have posted the biggest one-week drop in benchmark yields in nearly a year as bond investors have dismissed, for now, sporadic worries about inflation, instead fixing their gaze on signs the economy is slowing.
Consumer sentiment is seen as a rough proxy for consumer spending, and the weaker-than-expected University of Michigan preliminary August sentiment reading reinforced investor opinions that a slowdown is taking place.
"Such negative economic news could keep Treasury markets rallying", said Malcolm Polley, chief investment officer with S&T Wealth Management Group in Indiana, PA.
Late on Friday in New York, the benchmark 10-year note was up 8/32 in price, dropping its yield to 4.84 percent from 4.87 percent late on Thursday. Bond yields and prices move inversely.
"If the consumer is concerned about what is happening with the economy and may lighten up on their spending, that may lead to Fed action and cutting rates," Polley added.
The Federal Reserve held the federal funds rate unchanged at 5.25 percent at its last policy-setting meeting on August 8 after raising rates 17 consecutive times over two years. The University of Michigan sentiment index fell to 78.7 in August from 84.7 in July, the lowest reading since just after Hurricane Katrina and far lower than the 83.6 that economists had expected.
But a rise in inflation expectations, a component of the consumer sentiment report, raised questions for bond investors. If these continue to rise, the Federal Reserve might be forced to resume its rate rises, which would hurt bond prices.
The rise in inflation expectations "is not good for those that think the Fed has stopped and moved to an easing format," wrote Andrew Brenner, head of global fixed-income at Hapoalim Securities in New York. "Did anyone say stagflation?" he added.
"Stagflation" is an environment of stagnant economic growth but rising prices that could force the central bank to continue raising interest rates.
For the moment, however, bond investors appeared to dismiss that possibility. It's been a bullish week for bonds, with the benchmark Treasury note's yield falling over 15 basis points since Monday, marking the biggest weekly upward move in price since late May.
Those rising prices, and falling yields, were driven this week by tamer-than-expected readings on price inflation for July, along with evidence of a weakening housing market, which investors expect will keep the Fed in pause mode at its September meeting.
"The underlying positive sentiment in the market right now is keeping a bid in there," said Marty Mitchell, chief government trader at Stifel Nicolaus in Baltimore, Maryland.
Two-year Treasury notes were trading 1/32 higher in price for a yield of 4.88 percent from 4.91 percent as of late on Thursday, while 5-year notes were 4/32 higher in price for a yield of 4.79 percent from 4.82 percent. Thirty-year bonds were 11/32 higher in price for a yield of 4.98 percent.