• “It’s a bit of tug of war. The committee is divided,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.

Treasuries fell as traders weighed divergent views by Federal Reserve officials this week that clouded the
path on interest-rate cuts.  Yields rose about four basis points across tenors, with the rate on two-year notes — which closely track expectations for Fed policy — rising to 3.60% Wednesday in New York. It was an extension of a move that began last week after policymakers cut rates for the first time this year, but signaled they would take a cautious approach to further reductions.
Fed Chair Jerome Powell said on Tuesday that the central bank had to contend with both a weakening labor market and the
risk of higher inflation as it weighs future decisions. On Wednesday, Treasury Secretary Scott Bessent expressed
disappointment that Powell hasn’t clearly established an agenda for cutting rates.

“It’s a bit of tug of war. The committee is divided,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.

The move on Wednesday held steady after a five-year note auction draw yields about 0.3 basis points higher than the level
immediately before the sales.   Also weighing on Treasuries was corporate issuances, including a bond sale by Oracle Corp. The software tapped the US investment-grade bond market for $18 billion in the second- biggest debt sale this year.

What Bloomberg Strategists say…
“While it was well known that Oracle would be issuing bonds, the size was a surprise, and it — along with a handful of other investment-grade debt Wednesday — is adding to September’s already record supply. That lends to corporate treasurers rate locking the deals and buyers selling other inventory, often Treasuries, to make room for the new corporate bonds, weighing on US bonds.”
—Alyce Andres, US Rates/FX Strategist, Markets Live

Interest-rate swaps showed that traders see two more quarter-point cut this year is more likely than not, with a 90% probability of the first one coming next month. A total of about 100 basis points of easing were priced in for the next 12
months. That would bring the central bank policy rate to 3%, a level seen by most Fed officials as neutral – meaning it neither stimulates or restricts the economy.  For bond investors, the challenge ahead is to assess whether the labor market will continue to slow to validate the easing that’s priced in. Confronted with still elevated inflation, Fed officials themselves are divided on how to proceed with further easing, if at all.

In updated quarterly projections released following last week’s meeting, policymakers penciled in two additional quarter- point cuts this year, according to the median estimate. But several also saw one additional or no more cuts in 2025. Some policymakers have continued to advocate for a cautious approach to further rate cuts, given that inflation remains above the
Fed’s 2% target.

Nonetheless, the bond market is approaching the quarter-end with another solid gain for the month. The Bloomberg Treasuries Total Return Index has returned about 1% so far this month through Tuesday, extending the gains this year to 5.5%.