The bond market isn’t convinced that the Federal Reserve is done lowering rates even after policy makers signaled a pause unless the economic outlook changes materially.

Overnight swap rates fully priced out a December rate easing in the minutes following the central bank’s decision to cut for a third straight meeting, citing the implications of global developments. But they still see another reduction by July 2020, and yields on longer maturity Treasuries fell Thursday.

The reaction intensifies the focus on key U.S. data in the days ahead as investors try to divine the Fed’s path, starting with Friday’s figures on the labor market and manufacturing. Fed Chairman Jerome Powell said monetary policy “is in a good place.” But the market’s reaction reflects a darker take on the economic outlook, according to Conning’s Rich Sega.

“The rally in Treasuries and move lower in yields after the press conference means the market is reading the data that the economy is slowing, and remains pessimistic,” said Sega, global chief investment strategist at Conning, which manages about $171 billion.

Powell’s Assessment

Benchmark 10-year Treasury yields dropped to 1.73% Thursday, the lowest in more than a week. The yield curve flattened, and the Bloomberg Dollar Index extended declines. The move spread into Europe, with German 10-year yields falling 5 basis points to -0.41%.

In his press conference Wednesday, Powell noted that the risks around trade tensions and Brexit show signs of improvement. The euro area had its temperature taken with inflation data for the region slowing to an annual 0.7% in October, short of the European Central Bank’s target of close to but below 2%.

Chris Rands, a portfolio manager at Nikko Asset Management in Sydney, agrees with Powell’s assessment about the economy, arguing that bond markets have been too aggressive in pricing in more cuts. He sees Treasury yields climbing to 2% in three to six months.

“They’re hitting the targets they are after, with U.S. unemployment at the lowest in 50 years,” said Rands. “That’s nirvana.”

The Fed decision came after the Commerce Department reported better-than-expected economic growth in the third quarter, driven by consumer spending.

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