US yields dip as market in consolidation mode, after dovish Fed comments

US Treasury yields dipped on Friday while the most watched part of the yield curve steepened back near its widest level in 27 months, consolidating moves after this week's solid economic data and the Federal Reserve's super-sized rate cut.

Comments from Fed officials validating the Fed's 50 basis-point rate cut on Wednesday also weighed on yields.

The yield curve, a widely tracked barometer of the US economic outlook, steepened after the Fed's announcement of a rate cut of 50 basis points on Wednesday. It steepened once more on Friday, with the spread between the two-year and 10-year yields hitting positive 15.8 bps, the widest gap since June 2022. It was last at 14.8 bps.

No economic data was scheduled for release on Friday, but Fed speakers are free to comment on the new monetary policy framework now that the pre-FOMC blackout period is lifted.

US yields dipped following separate remarks from Fed Governor Christopher Waller and Philadelphia Fed President Patrick Harker on Friday, who both said the path of the economy justified the Fed's 50-bp rate cut.

In afternoon trading, benchmark 10-year Treasury yields US10YT=RR were last down 1.4 bps at 3.726%. They hit their highest level in about two weeks on Thursday following the release of stronger-than-expected initial jobless claims figures.

"The market has gotten too bearish on inflation expectations (and is) pricing in too many rate cuts" said Subadra Rajappa, head of US rates strategy at Societe Generale.

"All of the recent data points to continued strength in the economy," she added, citing recent strong economic data such as the lower-than-expected claims and strong retail sales.

US yields rose earlier in the day after the Bank of Japan kept the country's interest rates steady, tracking the move in Japanese government bonds. BOJ Governor Kazuo Ueda further signaled that it was in no rush to raise rates further.

On the front end of the curve, two-year yields 2.4 bps to 3.58%. For the week, however, the two year yields gained nearly 3 bps, the largest weekly rise since early August.

Fed futures traders have priced in 77 bps in rate cuts by the end of this year, and nearly 200 bps in cuts by December 2025.

Meanwhile the majority of economists polled by Reuters anticipate two more 25 bp rate cuts at the Fed's final two meetings this year.

Societe's Rajappa said she expects that yields on the long-end of the curve will have more room to rise in the near term, while front-end yields have less scope to decline from current levels.

The 30-year Treasury yield was flat at 4.077%, after hitting a two-week high on Thursday.

"Lower rates mean inflation might not continue to decline as much as projected, which makes long bond investors nervous and demand more yield," said Bryce Doty, senior portfolio manager at Sit Fixed Income Advisors.

In a Friday note, Deutsche Bank analysts forecast the two-year and 10-year yields would settle around 3.50% and 4.05%, respectively, by the middle of next year.

Several major economic data releases are scheduled for next week, including August figures which are expected to show a 0.2% monthly gain.