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Bond Report: 10-year Treasury yield falls to 3.6% after batch of soft U.S. data


Bond yields were lower for a second day on Tuesday as U.S. economic data releases continued to give some investors hope that the Federal Reserve may be nearing the peak of its rate-tightening cycle.

What’s happening

The yield on the 2-year Treasury

slipped less than 1 basis point to 4.097% from 4.103% on Monday.

The yield on the 10-year Treasury

retreated 3.4 basis points to 3.616% from 3.650% as of Monday afternoon.

The yield on the 30-year Treasury

fell 1.9 basis points to 3.686% versus Monday’s level of 3.705%.

The 10-year to 2-year spread shrank to as little as minus 52 basis points, leaving the Treasury curve deeply inverted in a sign of an impending economic downturn.

What’s driving markets

Two- through 30-year Treasury yields declined on Tuesday as soft U.S. data released this week reinforced the notion in some investors’ minds that policy makers might be forced at some point to back away from aggressive rate hikes.

Weaker-than-expected manufacturing data from the U.S. on Monday was being seen as a signal that rising interest rates may be having some effect on cooling demand for goods — which, in turn, led to hopes of a Federal Reserve “pivot,” according to Richard Hunter, head of markets at Interactive Investor. However, he said that with inflation stubbornly high, the central bank likely would need more data to consider changing course.

See: ‘We don’t need as many employees’: U.S. factories slow as rising interest rates rattle the economy

U.S. economic data released on Tuesday also showed that factory orders were flat for August as an expansion in the manufacturing sector slowed, while U.S. job openings fell to 10.1 million last month from 11.2 million previously in a sign that the red-hot labor market may be cooling off.

Markets are pricing in a 66% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.75% to 4% on Nov. 2, though stocks rallied on Tuesday as observers debate the merits of a “Fed pivot.” On Tuesday, fed-funds futures traders initially pulled back on their expectations of how high rates could go in the first half of 2023, and then reversed course by nudging their expectations back up again.

On Tuesday, Fed Gov. Philip Jefferson, in his first speech since joining the central bank, said that high inflation was his biggest concern. Meanwhile, San Francisco Fed President Mary Daly said there are signs that the U.S. labor market is starting to cool off.

Helping to nudge yields lower were calmer conditions in the U.K. sovereign bond sector. The 10-year gilt yield

dipped 9 basis points to 3.867% after reports the government will publish its debt-reducing plans early helped ease any further volatility.

News that the Reserve Bank of Australia delivered a smaller-than-expected 25 basis point interest rate increase on Tuesday surprised economists, who expected a 50-basis point move.

What analysts are saying

“Our baseline cyclical forecast includes shallow recessions and rising unemployment across large developed markets, with growth unlikely to bounce back quickly. Central bankers appear squarely focused on bringing inflation down,” said Pimco economist Tiffany Wilding and Andrew Balls, chief investment officer of global fixed income.

With inflation now broadening, “it is much less clear that inflation will moderate on its own without additional monetary tightening to bring real interest rates above their neutral levels. To date, real interest rates have remained low, despite generally tighter financial conditions, arguing for further nominal rate hikes,” they wrote in six- to 12-month economic outlook released on Tuesday.

Key Words: Global economy will ‘crumble’ if Fed doesn’t stop hiking interest rates, billionaire investor Sternlicht says

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