US yields falter as rate cut potential weighs
Removes reference to the two-year yield milestones in 9th paragraph
By Gertrude Chavez-Dreyfuss
NEW YORK, Aug 20 (Reuters) -U.S. Treasury yields slipped on Tuesday as an interest rate cut next month loomed large heading into Federal Reserve Chair Jerome Powell's remarks on Friday at a central bank gathering in Jackson Hole, Wyoming.
The federal funds futures market has fully priced in easing by the Fed at the September meeting, with a 74% chance of a 25 basis-point cut. Traders have also priced in about 97 bps of cuts by the end of the year, down from about 150 bps a few weeks ago at the height of the panic earlier this month driven by the soft U.S. nonfarm payrolls report for July and the sudden unwinding of the yen carry trade.
In a carry trade, an investor borrows in a currency with low interest rates like the yen and invests the proceeds in higher-yielding assets.
Since that turbulent period, the U.S. numbers have depicted an economy that is unlikely to tip into a recession anytime soon, even as the Bank of Japan has moved to calm investor nerves.
In late morning trading, the benchmark 10-year yield dipped 3.8 bps to 3.83% US10YT=RR. So far this month, it has dropped 27 bps, on track for its biggest monthly decline since December.
"What is driving yields lower has been the weaker economic landscape, combined with current policy rates being as elevated as they are. It's not as if people are forecasting recession," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.
"It is more about investors trying to reconcile where the economy is today and where policy rates should be. In that context, yields are kind of forcing the Fed at this point to reconsider adjustments going forward."
U.S. 30-year yields fell to a two-week low of 4.085% US30YT=RR, and were last down 2.5 bps at 4.09%.
On the front end of the curve, the two-year yield, which reflects interest rate moves by the Fed, fell 6.1 bps to 4.006% US2YT=RR.
The closely watched U.S. two-year/10-year yield curve narrowed its inversion, or steepened, to minus 18 bps US2US10=TWEB.
The curve bull-steepened on Tuesday, which means that short-dated rates fell more sharply than longer-dated ones. Yield curves historically steepen ahead of a Fed easing cycle, as investors price in the expectation that rates on the front end have and the Fed's next move would be a rate cut.
A steeper curve shows longer-dated yields are higher than those on shorter maturities, reflecting a normal upward slope. This means investors are being compensated more for the risk of holding longer-term securities.
Investors remained focused on the Jackson Hole meeting starting Friday, in which Chair Powell is scheduled to speak.
"We anticipate a generally dovish speech, with the Chair teeing up a rate cut at the next FOMC meeting on September 18," John Velis, macro strategist at BNY Mellon, wrote in a research note.
"However, we don't expect the speech to be heavy on specifics and it's unlikely that key questions about the size of the first rate cut, or the frequency or length of the cutting cycle will be answered."
Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan Oatis
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.