- Trump’s tax bill had passed through the US House of Representatives.
- Moody’s noted that the US government’s debt was huge and growing.
- US business activity improved in May.
Interest futures rebounded on Friday after reaching fresh lows in the previous session on US fiscal health concerns. The rebound came as bargain hunters bought the recent dip. However, the outlook for the bond market remains dim.
30-year Treasury yield (Source: Bloomberg)
Treasury yields soared before pulling back on Thursday after reports that Trump’s tax bill had passed through the US House of Representatives. The bill proposes several tax cuts and spending increases that will raise the government’s debt burden. This, in turn, will hurt investor confidence in US assets, especially Treasuries.
Interest futures have had a bearish week as Treasury yields jumped earlier in the week. The move followed a US credit rating downgrade by Moody’s. Moody’s noted that the US government’s debt was huge and growing. The downgrade caused a sell-off in US assets as investor confidence was shaken.
Moreover, the US reported a poor Treasury bonds auction this week, confirming the drop in demand. If Trump’s bill passes through the Senate, interest futures might drop further. At the same time, fiscal health concerns will increase.
Meanwhile, market participants also paid attention to US economic data. Business activity improved in May, indicating resilience despite expectations of weakness caused by Trump’s tariffs. Both the manufacturing and services sectors expanded. Notably, the manufacturing PMI came in at 52.3, above estimates of 49.9. Similarly, the services PMI rose to 52.3, beating forecasts of 51.0.
Recent economic data has supported the case for delayed Fed rate cuts. Although inflation was softer than expected. The economy is faring better than expected after Trump’s tariffs. However, experts believe the weakness is still on the way. Therefore, the outlook for Fed rate cuts will likely keep changing. Currently, market participants are pricing a 67% chance of a cut in September.
Traders will keep watching developments in US fiscal policies. Trump’s bill will now have to go through the Senate. Meanwhile, next week, the US will release the FOMC meeting minutes, which might contain clues on future moves. Additionally, a preliminary GDP report will show the state of the economy. A downbeat report will increase bets for a rate cut in September. On the other hand, if the economy is steady, the Fed might keep delaying cuts.
