US yields rise as markets stabilize, imminent recession fears ease
Updated at 1500 EDT
By Karen Brettell
NEW YORK, Aug 6 (Reuters) -U.S. Treasury yields rose on Tuesday as fears that the U.S. economy is quickly entering a recession were seen as overdone, while safe haven demand for U.S. bonds also ebbed as stock markets recovered.
Yields tumbled to more than one-year lows on Monday as investors repriced for rapid interest rate cuts by the Federal Reserve following an unexpected increase in the unemployment rate and fewer than expected job gains in July’s employment report on Friday.
Concerns about the knock-on effects of traders unwinding popular trades in which they sold the Japanese yen and bought U.S. assets has also been a concern as the yen rallies following a larger than expected rate increase by the Bank of Japan.
“We had two shocks really in the last week," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.
"The first being a downside economic shock evident from Friday's nonfarm payrolls report and hints of deceleration in the labor market. The second shock being a positioning shock related to divergent central bank policy between the Bank of Japan and the world's other major central banks,” LeBas said.
“You put those two things together and you get a recipe for some choppy action,” LeBas added. But, “the idea of pricing in a very high probability of an intermediate rate cut at a time when the economy is still growing and there's no obvious crisis is pretty goofy.”
Traders are now pricing in a 68% chance the Fed will cut rates by 50 basis points at its next scheduled policy meeting on September 17-18, and a 32% chance of a 25 basis point reduction. A cut of at least 50basis points was fully priced in on Monday, with a 75 basis point cut also seen possible, according to the CME Group's FedWatch Tool.
Traders had also begunpositioning for a possible emergency rate cut before September.
San Francisco Fed President Mary Daly said on Monday that many details in the jobs report leave "a little more room for confidence that we're slowing but not falling off a cliff.”
Chicago Fed President Austan Goolsbee also cautioned against taking too much of a signal from the global market sell-off, noting it stemmed in part from the Bank of Japan's decision last week to raise rates, as well as increasing geopolitical tensions in the Middle East.
U.S. services sector activity on Monday also boosted confidence in the economy as it rebounded from a four-year low in July amid a bounce back in new orders and the first increase in employment in six months.
Despite Tuesday's relative calm there remain concerns that the Fed will be too slow to cut rates.
Monetary policy works with a lag and "you have to get out in front of this deterioration before it happens. And because the labor market itself is an economic lagging indicator, then the Fed seems to really be setting itself up to be behind the curve," said Will Compernolle, macro strategist at FHN Financial.
Given the long wait before the Fed's September meeting, Fed Chair Jerome Powell may use the Jackson Hole Economic Policy Symposium on August 22-24 "as a way to ease without easing - to use forward guidance to essentially cut rates before the Fed actually cuts rates," Compernolle said.
Yields on interest rate sensitive two-year notes US2YT=RR were last up 10 basis points at 3.983%,after getting as low as 3.654% on Monday, the lowest since April 2023.
Benchmark 10-year note yields US10YT=R rose 10.5 basis points to 3.888%after reaching 3.667% on Monday, the lowest since June 2023.
The gap between two- and 10-year Treasury notes US2US10=TWEB was last at minus 10 basis points, after reaching 1.50 basis points on Monday. It was the first time it has turned positive since July 2022.
The Treasury saw solid demand for a $58 billion sale of three-year notes on Tuesday, the first sale of $125 billion in coupon-bearing debt supply this week.
The debt sold at a high yield of 3.810%, close to where it had traded before the auction. Demand was 2.55 times the amount of debt on offer. USAUCTION19
The government will also sell$42 billion in 10-year notes on Wednesday and $25 billion in 30-year bonds on Thursday.
Meanwhile safe-haven demand for Treasuries couldreturn with rising geopolitical tensions in the Middle East posing a risk to markets.
The leader of Hezbollah on Tuesday pledged a"strong and effective" response to the killing of its military commander by Israel last week no matter the consequences, and said Hezbollah would act either alone or with its regional allies.
Reporting By Karen Brettell; Additional reporting by Harry Robertson and Ankur Banerjee; editing by Jonathan Oatis and Nick Zieminski
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