Despite Strong U.S Data, Short-dated Treasuries Fall in Price

Short-term U.S. Treasuries edged lower on Thursday as stronger-than-expected economic and labor data slightly challenged market expectations for two Federal Reserve rate cuts by the end of the year.

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Yields on two- to five-year notes climbed at least two basis points, reaching session highs after the government revised second-quarter GDP growth to 3.3% from 3%, beating economists’ forecasts.

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Adding to the upbeat tone, weekly jobless claims fell more than anticipated, signaling continued strength in the labor market.

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“The numbers keep reinforcing the story of a resilient U.S. consumer despite ongoing tariff concerns,” noted Subadra Rajappa, head of U.S. rates strategy at Societe Generale.

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Rajappa pointed out that the front end of the Treasury curve remains caught in a “push and pull” dynamic over whether the Fed should deliver a September rate cut.

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While Fed Chair Jerome Powell has leaned toward a dovish approach, “the data continues to push back on the urgency for cuts,” she added.

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Despite Thursday’s dip, shorter-dated Treasury yields are still hovering near one-month lows after a recent rally driven by growing expectations of policy easing.

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For example, two-year notes sold at auction earlier this week closed Wednesday near 3.61% the lowest level since May 1. Following Thursday’s reports, yields bounced back slightly to around 3.64%.

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Meanwhile, swap markets tied to future Fed moves remain firm in pricing one 25-basis-point rate cut in October and another before year-end, keeping the overall outlook for easing intact.

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On the longer end of the curve, Treasury yields were modestly lower for the day, while the intermediate segment showed minimal change as traders awaited a $44 billion auction of seven-year notes at 1 p.m. in New York.

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This auction is projected to settle at the lowest yield for that tenor since September 2024. Earlier in the week, sales of two- and five-year notes cleared at their lowest yields since last fall, and those securities have since rallied further.

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