US bond yields "lost ground" to new lows for the year, with rate cuts and policy changes triggering a bond market frenzy.

Investors in US government bonds are starting to bet that the Federal Reserve will soon shift from being concerned about stubborn inflation to focusing on slowing economic growth. This sentiment has pushed US Treasury prices higher for the sixth consecutive trading day, with yields falling to the lowest levels of the year. Meanwhile, strategists at Morgan Stanley say that if the market's overall perception of the Fed changes, the yield on 10-year Treasury bonds could fall below 4%. Traders have resumed their expectations for two 25 basis point rate cuts by the Fed this year and a third next year, with rates expected to fall to around 3.65%. Morgan Stanley notes that if the market expects rates to fall to 3.25%, the yield on 10-year Treasury bonds could drop below 4%. The bank expects that the US Personal Consumption Expenditures (PCE) Price Index for January, to be released on Friday, will show a decrease in the rate of price growth, which could be a decisive factor. Strategists at Morgan Stanley, including Matthew Hornbach, stated in a report that if core PCE inflation data improves and Fed rhetoric becomes more dovish, investors will buy more longer-term bonds, allowing for further declines in market-implied low rates. This week's auctions of fixed-rate government bonds have all received strong demand, with the seven-year bond auction on Wednesday closing with a yield of 4.194%, lower than the 4.203% traded just before the auction deadline, indicating demand exceeded traders' expectations. Similar results were seen in earlier auctions of two-year and five-year bonds earlier in the week. Bloomberg macro strategist Alice Andrs stated that there is not much likelihood of trading below 4.25% (the next logical and psychological yield support level) without other fundamental data (such as Friday's PCE data). However, she also pointed out that the risk of dropping below 4.25% could trigger investor concerns about missing a rebound. The yield on the 10-year Treasury fell to around 4.24% on Wednesday and rose slightly to 4.28% during Asian trading hours on Thursday. In the second half of last year, the yield stayed below 4% for several months after July employment data showed significant weakness, making a rate cut by the Fed likely before the end of the year. Subsequently, the process of lowering inflation stalled, and the Fed paused rate cuts in January, stating that further cuts could worsen the situation. Now, investors not only see reasons for lower yields in economic growth indicators but also in US fiscal and immigration policies. These include President Donald Trump's threats to impose tariffs on major trading partners, a strategy that damaged the economy during his first term, causing concern among Fed policy makers. Hornbach wrote that the toughening of immigration policies might lead to short-term GDP growth next year falling below potential levels. As investors become more concerned about immigration trends, this should lower expectations of the still relatively high neutral rate. So far this year, Bloomberg's benchmark for US Treasury yields has risen by 2.3%, exceeding the 1.3% gain in the S&P 500 index. Most respondents in the February MLIV Pulse survey predict that US Treasury yields will surpass the US stock market over the next month. On Wednesday, Trump gave a series of conflicting answers regarding his plans to impose tariffs on Canada, Mexico, and the EU. Gregory Daco, chief economist at EY, stated that while the US economy remains strong, uncertainty in trade, fiscal, and regulatory policies casts a shadow on the outlook, possibly leading to market volatility as businesses and consumers adopt a more cautious approach. A new survey by the Federal Reserve Bank of Philadelphia found that nearly a third of American workers are worried about being laid off by their employers. The significant drop in consumer confidence on Tuesday is just the latest sign of an economic slowdown in the US. Citigroup's US Economic Surprise Index fell to its lowest level since September, indicating that data did not meet expectations. Morgan Stanley suggests that the reduction in expectations for rates may also be a result of the Trump administration's efforts to cut federal spending by laying off government employees since the president took office last month. At the same time, the government and its congressional allies are pushing for significant tax cuts, which could widen the US budget deficit, leading to additional borrowing. The budget blueprint passed by House Republicans last night calls for significant spending cuts to offset the deficit. Jim Bianco, president and macro strategist at Bianco Research, stated on Bloomberg TV that bonds are reacting to the possibility of reduced supply. Whether this will happen will be revealed later this year. And whether it is stimulative or inflationary will also be revealed later this year. In terms of inflation, the core PCE price index, excluding food and energy, has grown by about 2.8% for three consecutive months. Economists at Morgan Stanley had previously predicted a rate cut by the Fed in June, but now expect the January PCE Price Index to fall to 2.58%.