US yields modestly higher ahead of Fed minutes, 10-year auction
Dallas Fed President Logan supports smaller rate cuts
US rate futures market shows 85% chance of 25-bp cut in November
Yield curve flattening suggests slower pace of Fed easing
By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 9 (Reuters) -U.S. Treasury yields were marginally higher on Wednesday, with those on 10-year notes rising for six straight sessions, as investors continued to price in a less aggressive monetary easing cycle from the Federal Reserve.
Dallas Fed President Lorie Logan, who is not a voter at this year's Federal Open Market Committee (FOMC), expressed that gradual approach in remarks on Wednesday. She said she supported last month's big interest-rate cut but wants smaller reductions ahead, given "still real" upside risks to inflation and "meaningful uncertainties" over the economic outlook.
U.S. yields rose after her remarks. U.S. two-year yields, which are more sensitive to interest rate expectations, were last up less than a basis point (bp) at 3.986% US2YT=RR, gaining in five of the last six trading days.
Investors are also awaiting the Fed minutes to its last meeting and a U.S. 10-year auction later on Wednesday.
The minutes could provide some nuance as to how the Fed arrived at a rate cut of 50 basis points on Sept. 18.
While they are backward-looking, issued three weeks after each Fed meeting, they can shed light on the different opinions around each policy vote. In doing so, the minutes can provide the market a sense of how the Fed might react to incoming economic data.
The U.S. rate futures market has factored in an 85% chance of a 25-bp rate cut at the November meeting, and 15% chance of a pause, higher than the 12% seen on Tuesday, according to LSEG calculations.
The futures market also showed 50 bps of easing this year, and about 95 bps of Fed cuts in 2025. Next year's rate cut probability was a sharp decline from the roughly 250 bps reductions being estimated prior to the blowout U.S. nonfarm payrolls report that recalibrated Fed easing expectations.
"Before the Fed meeting and payrolls report, the rates market were pricing in a recession, while the spread market priced in a soft landing," said Vishal Khanduja, co-head of Broad Markets Fixed Income at Morgan Stanley Investment Management in Boston.
Spread market refers to corporate bonds, whose performance is measured in terms of a spread in basis points relative to U.S. Treasuries.
"Now we can say that the rates market as well as the spread market are both getting to the point of a soft landing being priced in. Again this is all not going to happen in a straight line, or smoothly. The Fed is data-dependent and when monetary policy is data-dependent, there is volatility around the important data points around inflation."
In late morning trading, the yield on the benchmark U.S. 10-year note US10YT=RR had inched higher to 4.041%.
U.S. 30-year bond yields US30YT=RR, however, slipped 1 bp to 4.316%.
The yield curve flattened slightly on Wednesday, with the spread between U.S. two-year and 10-year yields narrowing a little to 4.7 bps US2US10=TWEB, from 5 bps late on Tuesday. The flattening suggested that the rates market expects a slower pace of Fed easing, or smaller rate cuts, in the coming months.
Also on Wednesday, the U.S. Treasury is selling $39 billion in 10-year notes, and the reception to the auction could go either way.
"Not only does the proximity to the (Fed) minutes marginally complicate the setup for the duration offering, investors will need to contend with the event risk posed by tomorrow's core-CPI update," BMO Capital said in a research note.
"While these events will likely leave some otherwise would-be buyers on the sidelines, we suspect the post-payrolls downtrade has extended far enough to entice a reasonably solid bid from end users with 10-year rates back above 4.0%."
The U.S. consumer price index is also a focus on Thursday.
Morgan Stanley's Khanduja believes that the disinflation trend will continues, given that the real-time indicators his firm tracks are not showing stresses.
Reporting by Gertrude Chavez-Dreyfuss; Editing by Emelia Sithole-Matarise
ताजातरीन समाचार
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