Treasury yields fell on Wednesday as soft economic data of late continued to underpin bond prices.
What’s happening
The yield on the 2-year Treasury
TMUBMUSD02Y,
slipped by 1.7 basis points to 4.445%. Yields move in the opposite direction to prices.
The yield on the 10-year Treasury
TMUBMUSD10Y,
retreated 4 basis points to 4.063%.
The yield on the 30-year Treasury
TMUBMUSD30Y,
fell 7.1 basis points to 4.193%.
What’s driving markets
Treasury yields dipped to their lowest in more than a week with investors betting that recent soft economic data will help suppress inflation and reduced the need for the Federal reserve to continue aggressively hiking interest rates.
“Markets are getting increasingly sensitive to housing at the moment and thus the news [on Tuesday] that the FHFA house price index surprised on the downside – the lowest reading and the first back-to-back monthly decline since 2011 -…seemed to be the rates catalyst yesterday”, said strategists at Deutsche Bank.
“We also saw consumer confidence miss, coming in at 102.5, falling from 108.0 in September and by more than expected (105.9), with both present situation and expectations declining. Lastly, a miss on the Richmond Fed manufacturing index (-10 vs -5) added to a downbeat message from the data,” Deutsche added.
Such news, which will be followed on Wednesday by the September new home sales report, has hit a market where “liquidity is still thin and…outsized moves can occur due to flows that would have been absorbed much easier prior to the beginning of the tightening cycle,” said Jan Nevruzi, U.S. rates strategist at NatWest Markets.
“Still, I think the Fed entered the blackout period with a relatively dovish message and in the absence of refuting data, the takeaway for investors might be that the Fed is happy with the current levels of financial conditions and are okay to follow through, rather than add more. If that were to be the case, I think longer dated real yields offer value here,” Nevruzi added.
Markets are pricing in a 97.5% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.75% to 4.00% after its meeting on November 2nd. The central bank is expected to take its Fed funds rate target to 4.9% by April 2023, according to the CME FedWatch tool.
