Data Clouds Rate Cut Path, Pushing Treasury Yields to a Three Week High

U.S. Treasury yields climbed on Thursday after fresh economic data signaled resilience in the labor market, pushing borrowing costs to their highest levels since early September. The stronger reports prompted traders to dial back expectations for aggressive Federal Reserve rate cuts over the coming months.

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Shorter-dated yields, which move most closely with Fed policy outlooks, led the rise. Weekly jobless claims came in below forecasts, while separate government data showed the economy expanded faster than expected in the third quarter. In afternoon trading in New York, the two-year yield rose about six basis points to 3.67% its highest since early September extending a rebound from last week’s low of 3.47%, which came just before the Fed cut rates by a quarter point.

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Traders trimmed bets on another quarter-point cut at the late-October meeting, though they still broadly expect it to happen. Sentiment remains supported by labor market revisions earlier this month that pointed to weaker hiring trends, fueling pressure on policymakers to ease.

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“Today’s data doesn’t strongly support another cut, but I still believe we’ll see reductions in both October and December as labor market conditions continue to deteriorate,” said Tom di Galoma, managing director at Mischler Financial Group.

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The market held onto most of its losses even after a $44 billion auction of seven-year Treasuries drew slightly weaker demand than expected ahead of the 1 p.m. New York deadline.

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The benchmark 10-year note yield rose two basis points to 4.17%, while the 30-year yield steadied near 4.75% after erasing earlier losses. With long-term yields lagging shorter maturities, the Treasury curve flattened further. The gap between five- and 30-year yields slipped below one percentage point for the first time since Aug. 11.

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A flatter yield curve often signals skepticism that the Fed will be able to deliver the full sequence of cuts traders once expected. Until recently, markets had priced in a terminal rate near 3%, but that view has shifted higher. A market-based measure of the cycle’s low has climbed to 3.11%.

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“This month’s numbers reduce recession risks slightly and improve the outlook for recovery,” said Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investments. “The overall impact is a repricing of the terminal rate higher.” He added that it could drift toward 3.5%, which would flatten the curve even further.

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Swap contracts reflected a modest pullback in easing bets. Traders are now pricing about 20 basis points of cuts for the Fed’s Oct. 28–29 meeting, down from 22 basis points on Wednesday. For both October and December combined, markets expect under 38 basis points of easing versus 42 basis points previously.

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“Our neutral view is 3%, which is largely aligned with where the market is priced,” said Molly Brooks, U.S. rates strategist at TD Securities. The bank expects two additional cuts in 2025, followed by quarterly reductions through 2026, which Brooks described as “broadly consistent” with market positioning.

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Ahead of Thursday’s data release, Stephen Miran the Fed’s newest policymaker reiterated his view that the neutral rate, the level neither stimulating nor restricting growth, is declining. Speaking on Bloomberg TV, Miran argued for swift and sizable easing, suggesting the central bank should lower the funds rate by 1.5 to 2 percentage points from the current 4%–4.25% range.

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Miran, appointed by former President Donald Trump, signaled at last week’s policy meeting that he favors 1.5 percentage points of cuts before year-end. “The Fed risks harming the economy if it doesn’t move quickly to lower rates,” he said.

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Other Fed officials offered contrasting perspectives. Vice Chair for Supervision Michelle Bowman noted inflation is close enough to target to justify further cuts, given the weakening job market. In contrast, Kansas City Fed President Jeff Schmid suggested additional easing may not be necessary, stressing the importance of continuing to bring inflation down.

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Dallas Fed President Lorie Logan added a separate policy idea, suggesting the central bank should replace the federal funds rate as its benchmark. She advocated for adopting an overnight rate tied to the more liquid market for Treasury-backed loans.

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The Treasury capped off this week’s debt issuance with the seven-year note auction, which cleared at 3.953%. That was about 0.6 basis points higher than the pre-auction yield indication, reflecting slightly softer investor appetite.

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