Treasury yields fall: Treasury yields fell, with two-year yields hitting a 15-month low on Wednesday after a report showing a drop in US job openings to a 3.5-year low in July. The yield curve between two-year and 10-year bonds also turned positive for the first time since August 5. The upcoming August jobs report, scheduled for release on Friday, could influence the Federal Reserve’s decision at its September 17-18 meeting on a possible 25- or 50-basis-point rate cut. Ian Lyngen, head of US rates strategy at BMO Capital Markets, noted: “The main event this week is Friday’s payrolls report. It will largely determine what to expect from the Fed. Jobs data is now the main focus, outweighing inflation concerns.”
Bets on rate cuts rise
Following Wednesday’s job openings data, traders raised their expectations for a larger rate cut of 50 basis points. There is currently a 43 percent chance of a 50 basis point cut, up from 39 percent before the data, and a 57 percent chance of a 25 basis point cut, according to CME Group’s FedWatch tool. Atlanta Fed President Raphael Bostic warned Wednesday that keeping interest rates too high for too long could negatively impact employment. However, Subadra Rajappa, head of U.S. rates strategy at Societe Generale, suggested the market may be overreacting to the data as the economy continues to show solid growth. “There is no substantial evidence to suggest an imminent recession,” Rajappa noted. “The aggressive pricing of rate cuts by the market may be premature.” Traders expect 237 basis points of rate cuts by the end of 2025. Two-year bond yields fell 10.5 basis points to 3.783%, having hit 3.772%, the lowest since May 2023. Benchmark 10-year bond yields fell 6.6 basis points to 3.778%, having hit 3.767%, the lowest since Aug. 20.
Inversion of the yield curve
The yield curve between two- and 10-year Treasuries briefly turned positive before falling back to minus 0.70 basis points. This inversion, in which short-term yields are higher than long-term yields, has persisted since July 2022 and is seen as a potential recession signal. Despite the inversion, many analysts believe the U.S. economy will weaken but avoid a recession. Friday’s jobs report is expected to show an addition of 160,000 jobs in August, and the unemployment rate is expected to decline to 4.2% from 4.3% in July. The Federal Reserve’s Beige Book noted a slowdown in economic activity and reduced hiring from mid-July through late August.(With contributions from Reuters)
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