TREASURIES-Prices rise as Fed's Waller bats for July rate cut, amid technical buying

By Gertrude Chavez-Dreyfuss

NEW YORK, July 18 (Reuters) - U.S. Treasuries rose on Friday, dragging their yields lower, after comments from Federal Reserve Governor Christopher Waller pushed for a rate cut later this month, while technical buying also contributed to the move higher.

Friday's economic reports were mixed, providing little clarity on the day's rate moves. The benchmark 10-year yield was down 2.7 basis points (bps) on the day at 4.436% US10YT=RR, but up for a third straight week. U.S. 30-year yields slipped, down 1.2 bps at 5.001% US30YT=RR, but were also on track for their third consecutive weekly rise.

The two-year yield, which reflects interest rate expectations, fell 4.4 bps to 3.873% US2YT=RR. On the week, the yield was down 4.3 bps, its largest weekly decline since June 23.

Some analysts said Treasuries saw a technical bounce on Friday after being oversold for most of the week. U.S. Treasury yields across the curve hit multi-week peaks earlier this week.

Analysts said Waller kept Treasuries well-bid. He reiterated his stance late on Thursday and on Friday that the U.S. central bank should cut interest rates at the end of this month amid mounting risks to the economy and the strong likelihood that tariff-induced inflation will not drive a persistent rise in price pressures. Waller was also concerned about private sector hiring starting to slow.

"It seems like comments by Waller about potentially cutting rates this month seem to be spurring some optimism overall," said Zachary Griffiths, head of investment grade and macro strategy at CreditSights in Charlotte, North Carolina.

"It's propelling not only a rally in Treasuries, but risk sentiment more broadly."

Griffiths said Waller has made his stance on rate cuts well known for several weeks, but his focus on the labor market instead of inflation caught the market's attention.

"Maybe it's opening this front that the labor market is weaker, and introducing this idea or justification for earlier moves could be the new piece of information."

Bond investors expect the Fed to remain on hold at this month's policy meeting. The U.S. rate futures market has very slightly increased the odds of a rate cut in July to 4.7% from about 3% a few days ago, according to LSEG estimates. The September probability, which was about 50-50 on Thursday, increased to 62% on Friday.

Data continued to depict an economy that is fairly resilient, with some pockets of weakness.

U.S. housing starts increased by 4.6% in June, higher than expectations. Multi-family housing starts also rebounded sharply. But single-family housing starts, which account for the bulk of homebuilding, dropped 4.6% to a seasonally adjusted annual rate of 883,000 units last month, the lowest level since July 2024.

Another report - the University of Michigan Surveys of Consumers - showed that consumer sentiment remained upbeat while inflation expectations declined. The Consumer Sentiment Index rose to 61.8 this month from a final reading of 60.7 in June. Economists polled by Reuters had forecast the index would increase to 61.5.

Data further showed consumers' 12-month inflation expectations dropped to 4.4% from 5.0% in June. Long-run inflation expectations fell to 3.6% from 4.0% last month.

"Despite risks of rising consumer inflation in the next few months, consumers have well-anchored expectations that tariff inflation will be temporary, and that conditions should improve by the time we enter 2026," wrote Jeffrey Roach, chief economist at LPL Financial, in emailed comments after the data.

"Inflation expectation is an important factor for the Fed and according to this report, the trajectory looks encouraging."