NEW YORK, Sept 8 – U.S. Treasury yields fell in subdued trade on Monday after Friday’s bleak employment report boosted bonds and all but locked in at least a quarter point easing next week, though traders awaited further confirmation from midweek inflation reports.
The yield on the benchmark 10-year note extended its drop to a new five-month low, while the two-year yield stayed inside Friday’s range.
“Friday’s rally has so far been maintained during overnight trading. A cool PPI or CPI this week could push 10-year yields below 4%, but next week’s FOMC will be the more decisive anchor,” said Will Compernolle, rates strategist at FHN Financial in Memphis, in a client note. In the wake of the nonfarm payrolls report showing an increase of only 22,000 jobs in August, much lower than forecasts for 75,000 positions and an upwardly revised 79,000 in July, investors have played down the growth outlook and upgraded the odds for a Federal Reserve cut this month that would mark the first ease since December.
The U.S. economy actually lost 13,000 jobs in June instead of the initially reported 14,000 payrolls gain, the report showed. The rate futures market sees zero chance that the Fed will stay on hold after next week’s two-day meeting, even briefly pricing in post jobs report as much as a 15% chance the 4.25%-4.50% fed funds target would be slashed by 50 basis points, which has not been done since the first easing this cycle in Sept 2024.
The latest betting shows a 90% chance of a 25 basis-point cut and 10% of 50 bp.
Meanwhile, the market has two big inflation reports this week to fold into its Fed expectations: August’s Producer Price Index on Wednesday, and more crucially its Consumer Price Index on Thursday.
“I can’t see a 50 basis-point at this juncture. So I’m betting on 25 basis points,” said Kim Rupert, managing director of fixed income at Action Economics in San Francisco.
“I think the structure of guidance is going to, again, depend a lot on CPI. If CPI is hot, then it’s going to be a more wait-and-see kind of statement from regarding future cuts.”
Also on the docket this week as important indicators of demand for Treasuries are a three-year note auctions on Tuesday, a 10-year note auction on Wednesday and Treasury’s sale of 30-year bonds Thursday. “We’ve gone past the “sell America” kind of narrative, so I don’t think that’s going to be problematic,” Rupert said. Although it is interesting, there’s still a lot of fiscal issues that are hitting Europe right now, so I think the U.S. will still be seen as a very good investment.”
The 10-year yield was down 2.7 basis points at 4.059%, near its lowest level since April 7.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 1.9 basis points to 3.488%.
The yield on the 30-year bond fell 4.3 basis points to 4.731%. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 56.9 basis points.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities was last at 2.446% after closing at 2.452% on September 5.
The 10-year TIPS breakeven rate was last at 2.362%, indicating the market sees inflation averaging less than 2.4% a year for the next decade.
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