TREASURIES-U.S. bonds build on rally as inflation slows

BY Reuters | TREASURY | 05/15/24 11:03 PM EDT

SINGAPORE, May 16 (Reuters) - U.S. Treasuries rallied in Asia trade on Thursday as signs of cooling inflation and a slowing U.S. economy were seen as opening the door to a couple of interest rate cuts this year.

Two-year yields fell three basis points (bps) to touch a six-week low of 4.705%. Ten-year yields, which dropped 9 basis points on Wednesday, fell a further 4 bps to 4.313%, also a six-week low. Yields fall when bond prices rise.

On Wednesday U.S. core inflation slowed to 3.6% in April. That was in line with market expectations but taken by traders as an encouraging signal after a few months of stickiness.

Flat retail sales in April, against expectations for a 0.4% rise, also contributed to the sense of a slowing economy.

"It's not a recession, but it's a much awaited and much needed slowing in consumption," said Naka Matsuzawa, chief macro strategist at Nomura in Tokyo.

"So that's definitely the prerequisite for any significant slowdown in inflation toward 2%."

Fed funds futures imply 52 bps of cuts priced in this year, up from 45 basis points on Tuesday, with the first 25 bp cut likely in September.

Thirty-year yields fell four bps to a six-week low of 4.475%. Separately, foreign holdings of U.S. Treasuries surged to a record high in March, data from the Treasury Department showed, rising for a sixth straight month. (Reporting by Tom Westbrook Editing by Shri Navaratnam)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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