Washington (Washington Insider Magazine) – Treasury yields fell sharply Thursday after Cleveland Fed President Beth Hammack suggested the central bank could consider rate cuts as early as June, sparking a rally in short-term bonds while leaving May’s meeting unchanged.
Market Reaction: Short-End Leads Rally
The Treasury market staged a notable rally Thursday, with short-dated bonds leading the charge as traders recalibrated expectations for Federal Reserve rate cuts.
The yield on two-year notes—particularly sensitive to shifts in monetary policy—fell as much as 8 basis points to dip below 3.79%, though it remained within Wednesday’s trading range. The move reflected growing, if cautious, optimism that the Fed could begin easing as early as June, with interest rate swaps now pricing in 15 basis points of cuts for the June 17-18 meeting—equivalent to a 60% chance of a quarter-point reduction and up slightly from 13 basis points the previous day.
The market’s outlook for cumulative easing also firmed, with swaps anticipating 54 basis points of cuts by September (a 4 basis-point increase from Wednesday) and about 85 basis points by year-end, suggesting traders expect at least three quarter-point reductions in 2025. The rally in short-term yields notably outpaced that of longer-dated Treasuries, underscoring how Fed policy expectations rather than growth fears drove the day’s action.
Fed’s Hammack: June Cut Possible With “Clear Data”
Speaking on CNBC, Hammack said:
“If we have clear and convincing data by June and know which way to move, we could act.”
But she ruled out changes at the May 6-7 meeting, calling it “too soon.”
Divergent Views on Timing
Tom di Galoma, Mischler Financial MD:
“The Fed will likely cut in June, especially if ongoing trade tariffs slow the US economy further. Rates are too high given tariff uncertainty.”
The market rally for Treasury bonds led to a lower yield when the $44 billion seven-year note auction occurred. The notes received a 4.123% note award matching the level of their briefly time-adjusted yield until 1 p.m. The yields reached their September lows during the New York time deadline for bidding. Primary dealers bought 15.3% of the issued notes, which marked a nine-month high since the last time they achieved this level.
The degree of anticipation regarding Federal Reserve rate decreases throughout 2025 has been on an upward and downward trajectory since December when the central bank completed its three cumulative 100 basis point cuts that established its overnight lending rate band at 4.25%-5%.
Multiple Wall Street economists expected new rate cuts to start in June 2025 when the year began, but some believed the Fed would abstain from action throughout the entire year. Market bets for at least two annual Federal Reserve rate cuts rose because personal spending weakened and inflation slowed, yet strategists still hesitated before fully predicting July’s action.
