US yields sink after weak data, dovish Powell affirm September cut
By Gertrude Chavez-Dreyfuss
NEW YORK, Aug 1 (Reuters) -U.S. Treasury yields tumbled on Thursday after soft economic data and dovish comments from Federal Reserve Chair Jerome Powell in the previous session, cementing expectations that the central bank will finally cut interest rates next month, the first in more than four years.
U.S. two-year to 10-year note yields dropped to six-month lows, while those on 20-year and 30-year bonds slid to their weakest level since March.
The Fed statement on Wednesday, after holding steady the benchmark overnight rate to a target range between 5.25%-5.50%, used neutral language that opens the door for rates to fall.
Powell further reinforced the message in his press conference, noting that price pressures were now easing broadly in the economy and calling it "quality" disinflation. He added that if upcoming data evolves as anticipated, the confidence to cut rates will grow.
Couple that with Thursday's data showing further contraction in the U.S. manufacturing sector and a decline in construction spending and the case for September easing continues to strengthen.
"In hearing Powell's speak at his press conference, it seems ... to me that the Fed's base case is that they plan to move and cut in September," said Jeff Klingelhofer, co-head of investments and portfolio manager at Thornburg Investment Management in Santa Fe, New Mexico.
"It's a mistake for the market, however, to assume that the Fed is going to cut every meeting going forward. What the Fed is trying to set up here is that there is a better balance of risks and it's probably prudent at this point after cutting in September ... to proceed gradually and cautiously at that point."
The rate futures market has fully priced in a rate cut at next month's meeting, with about 75 basis points (bps) of easing factored in this year, LSEG calculations showed, equivalent to three cuts of 25 bps each.
The market, however, has increasingly priced in chances of a 50 bps cut in September, now at 20%, from 12.5% on Tuesday.
In late morning trading, the benchmark 10-year yield sank 13.5 bps to 3.97% US10YT=RR, on track for its largest daily fall since mid-December. Earlier in the session, it fell to a six-month low of 3.965%.
On the front end of the curve, the two-year yield, which reflects interest rate moves by the Fed, was down 14.9 bps at 4.191% US2YT=RR, after earlier sliding to its weakest level since early February. It was on track for its biggest daily decline since December 13.
Treasury yields extended their fall after a slew of weak economic data that started with U.S. jobless claims increasing 14,000 to a seasonally-adjusted 249,000 for the week ended July 27, the highest level since August last year.
In addition, a measure of U.S. manufacturing activity dropped to an eight-month low in July amid a slump in new orders. The Institute for Supply Management (ISM) said its manufacturing PMI dropped to 46.8 last month, the lowest reading since November, from 48.5 in June. A PMI reading below 50 indicates contraction in the manufacturing sector.
U.S. construction spending also showed softness, unexpectedly falling 0.3% in June, after a downwardly revised 0.4% decline in May. Economists polled by Reuters had forecast construction spending rising 0.2%.
In other parts of the bond market, the closely-watched U.S. two-year/10-year yield curve narrowed its inversion, or steepened, to minus 22 bps US2US10=TWEB.
The curve on Thursday is in a bull-steepening phase, in which short-dated rates are falling more sharply than longer-dated ones. Yield curves in general steepen ahead of the Fed easing cycle, with investors pricing in lower yields on the front end.
A steeper curve shows higher longer-dated yields than those on shorter maturities, reflecting a normal upward slope.
Reporting by Gertrude Chavez-Dreyfuss
Editing by Nick Zieminski
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