US bond yields fell, the market digested optimistic economic data

Treasury yields fell back on Friday, partially reversing the previous day's sharp rally asforeign exchange tradingInvestors digested data showing U.S. consumer resilience and a falling inflation trend, leaving plenty of room for the Federal Reserve to cut interest rates slightly next month.

After last week's ups and downs, Treasury bonds ended slightly mixed, with volatility weakening almost as sharply as it had spiked two weeks earlier. Volatility soared after the unemployment data sparked near-panic that the economy was headed for a recession rather than a soft landing.

(U.S. Treasury Yield Trend Chart)

That sent yields to levels not seen in more than a year as investors turned to the safety of Treasuries and dumped stocks.

But last week's healthy retail sales data and a weaker-than-expected increase in unemployment benefits, combined with tepid inflation data earlier in the week, restored confidence in the economy. That sent yields on two- and 10-year bonds to their biggest gains in weeks as investors reversed course. When bond prices rise, yields fall.

"Yields have fallen slightly, so Treasuries still look good and are rebounding," said Kim Rupert, managing director of fixed income at Action Economics in San Francisco.

He said: "The market has been super volatile, so we've seen some calm in the market. I think the September rate cut is pretty much certain and the market is happy about that."

Rupert also said that safe haven demand for Treasury bonds rose on August 16, mainly due to geopolitical risk factors such as the situation in the Middle East and the Russian-Ukrainian war.

With no FOMC meeting in August, markets are seeking a strong signal from Federal Reserve Chairperson Jerome Powell when he addresses the central bank's annual symposium in Jackson Hole, Wyoming, on Friday.

"August 16 was just a bit of a correction from the previous day's outsized move," said Jan Nevruzi, U.S. rates strategist at TD Securities. "We saw some cracks in the unemployment rate, but the underlying trend didn't really collapse."

He said: "I think it will be difficult for Powell to demonstrate in his Jackson Hole speech on August 23 that we need a significant rate cut."

The yield on the benchmark 10-year Treasury note fell 3.6 basis points to 3.89 per cent on Friday from late Thursday, narrowing its biggest one-week gain on Thursday, when yields fell 5.2 basis points.

Yields on two-year Treasuries, which typically move in tandem with interest rate expectations, hit their highest since Aug. 2 on Thursday, falling 3.7 basis points to 4.0644 percent late Friday. Yields rose 15.9 basis points on Thursday, the biggest gain since April 10. Last week's gain was less than 1 basis point.