Treasury Bonds Post Third Week of Gains on Fed Rate-cut Bets

U.S. Treasuries capped off their third consecutive week of gains, as investors increasingly bet that the Federal Reserve is preparing to lower interest rates at least twice before the end of the year. The Bloomberg U.S. Treasury Index climbed 0.8% over the past week, marking its strongest stretch since early April and setting the stage for what could be its best monthly performance since February.

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This bond market rally has been powered by a string of economic data that bolstered expectations for Fed rate cuts, as well as speculation that President Donald Trump may appoint a more dovish Federal Reserve Chair. Additionally, Fed Governors Christopher Waller and Michelle Bowman recently indicated that they’d be open to a rate cut as soon as the Fed’s next policy meeting.

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“The market really got excited around the idea of a more dovish Fed,” said Gregory Peters, co-chief investment officer at PGIM Fixed Income. “Now, economic data will play a more central role in guiding expectations.”

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Despite gains for the week, Treasury prices fell slightly on Friday after economic data revealed stronger-than-expected inflation, pushing yields higher across maturities. Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investment, said the bond market had likely “overshot” based on Waller and Bowman’s comments and was pulling back some risk ahead of the weekend.

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Meanwhile, a Bloomberg index tracking the U.S. dollar surged to its highest level of the day Friday after Trump announced a halt to trade negotiations with Canada and floated the idea of new tariffs. In response, Canadian bonds outperformed those of other developed markets.

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Looking ahead, the Treasury market may find further support from technical factors. These include end-of-month rebalancing on Monday, which could spur additional buying, and a temporary pause in Treasury coupon auctions until July 8, reducing supply pressure in the near term.

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Currently, traders are fully pricing in two Fed rate cuts for 2025, with the first anticipated in September. The odds of a cut in July remain low — under 20% — but market participants are eyeing key economic releases next week, especially June’s jobs report, due Thursday ahead of the Independence Day holiday.

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Economists surveyed by Bloomberg expect job growth to slow to 120,000, down from 139,000 in May. The unemployment rate is projected to edge up to 4.3%, which would be the highest since 2021 but still relatively moderate.

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“There’s growing optimism that rate cuts are on the horizon, largely thanks to comments from Waller and Bowman indicating that July is still in play,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, in a interview. He noted that Fed policymakers are currently divided into two camps — one calling for two rate cuts this year and another preferring none. TD Securities projects that the Fed will begin easing in October, by which time it will have more clarity on inflation trends and labor market conditions.

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“We think interest rates will gradually drift lower,” Goldberg said, adding that TD’s year-end forecast for the 10-year Treasury yield is 4%.

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Other factors supporting Treasuries include proposed adjustments to U.S. banking capital rules. Fed Chair Jerome Powell recently stated that these changes would enhance banks’ ability to act as market intermediaries.

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In addition, the removal of the controversial Section 899 “revenge tax” proposal — previously a concern on Wall Street — didn’t move markets significantly but could help improve investor sentiment toward U.S. assets.

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Investors are also monitoring the progress of President Trump’s “big beautiful bill,” which is nearing a vote in the Senate. The proposal has raised fresh concerns about the U.S. fiscal deficit, which in turn has pressured longer-term Treasury yields.

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Wells Fargo strategists predict that the yield spread between the 10-year and 30-year Treasuries could widen to 75 basis points by the end of 2025, up from the current spread of around 55 basis points. They warn of a possible “fiscal blowout” scenario in which ballooning government debt leads to increased supply of long-dated bonds, pushing yields higher.

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“We anticipate that very long-dated bonds will continue to underperform five- and 10-year maturities,” wrote a Wells Fargo team led by Michael Schumacher. “The rise in 30-year yields is largely driven by investor concerns about future bond issuance.”

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As the second half of the year begins, all eyes will be on upcoming economic data and Fed commentary. While traders remain optimistic about easing inflation and eventual rate cuts, the path forward may depend heavily on the strength of labor market readings, fiscal policy developments, and how the Fed interprets mixed economic signals.

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