Most bond yields turned lower on Tuesday after U.S. economic data releases continued to give many 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
TMUBMUSD02Y,
4.084%
slipped to 4.055% from 4.103% on Monday. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.619%
retreated to 3.587% from 3.650% as of Monday afternoon. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.701%
fell to 3.661% versus Monday’s level of 3.705%. - The 10-year to 2-year spread of minus 46 basis points means Treasury curve remains deeply inverted, signaling an impending economic downturn.
What’s driving markets
Most Treasury yields were backing further away from recent multi-year highs as soft U.S. data released this week encouraged traders to trim bets on aggressive interest rate hikes by the Federal Reserve.
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
Markets are pricing in a 60% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.75% to 4% on Nov. 2. Fed-funds futures traders have pulled back, though, on their expectations of how high rates could go in the first half of 2023.
U.S. economic data released on Tuesday 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 the red-hot labor market may be cooling off.
Fed Gov. Philip Jefferson is set to deliver his first speech since joining the central bank on Tuesday, while investors will also hear from San Francisco Fed President Mary Daly.
Also helping to nudge yields lower are calmer conditions in the U.K. sovereign bond sector. Last week’s volatility in the gilt market — sparked by the government announcing a budget of debt-funded tax cuts — had triggered a sharp sell off across the fixed-income spectrum, with benchmark U.K. 10-year yields
TMBMKGB-10Y,
spiking to a 14-year high above 4.5%.
However, on Tuesday, gilt yields dipped 12 basis points to 3.837% after reports the government will publish its debt-reducing plans early, after taking a U-turn on cutting taxes for the wealthy.
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.
