The US Treasury market is heading for its best weekly gain this month as economic angst reinforces bets on interest-rate cuts.

A Bloomberg gauge of US government debt is up 0.5% this week, bringing its return for the year to 2.7% — the best start since 2022. The latest leg follows the Federal Reserve’s March policy meeting, in which Chair Jerome Powell underscored the uncertainty around the outlook.

Traders are pricing in about 70 basis points of rate reductions by the end of the year, implying expectations for two quarter-point cuts in 2025. A third move is fully priced in by January 2026.

“The baseline is that inflation is transitory,” said Gang Hu, managing partner at Winshore Capital Partners. And “if the economy weakens, Powell’s not afraid of cutting rates. I won’t be surprised if they end up cutting three times this year.”

For bond investors who’d been piling into Treasuries over recent weeks, Wednesday’s Fed policy announcement offered vindication. Officials downgraded their expectations for growth and touted the cloudiness of the outlook, spurring demand for havens such as the dollar and Treasuries.

The market is signaling that there’s more concern about downside risks — like economic weakness — rather than the upside risks tied to taxes and deregulation, said Priya Misra, portfolio manager at JP Morgan Asset Management, on Bloomberg Television. There’s still plenty of room for 10-year yields to slide if cracks appear in the data, she said. 

Ten-year yields sank over the week by about 10 basis points to 4.2%, approaching year-to-date lows. Open interest increased in 10-year note futures for a seventh straight session, consistent with traders taking on new long positions.

Recent flows in Treasury options included a block trade targeting a drop in the 10-year yield to roughly 3.8% by late April. 

On Friday, yields diverged, with two- through five-year yields sliding further while longer-maturity yields edged higher. The moves pushed the spread between and five- and 30-year yields to nearly 60 basis points, the steepest since September. 

The 10-year note’s yield has scope to return to 4% — last seen in October — if employment data fall short of expectations, Bloomberg Intelligence strategists led by Ira Jersey wrote Friday. 

Vishwanath Tirupattur, Morgan Stanley’s chief fixed income strategist, expects 10-year yields of 4% by year-end and just one Fed rate cut in 2025, followed by more in 2026. 

“As the weakness in hard data begins to manifest, the market will start to expect that there will be a lot more cuts needed in the year ahead,” he said on Bloomberg Television on Friday. “So the market will begin to price in more cuts.”

With assistance from Ye Xie and Edward Bolingbroke.

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