A global bond rally accelerated on Tuesday, leading to the largest two-day decline in US Treasury benchmark yields this year, driven by signs of a slowing US economy.
The yields on five, 10-, and 30-year Treasury notes dropped by at least 15 basis points this week. This was triggered by weak manufacturing data on Monday and a larger-than-expected drop in US job openings on Tuesday. By the afternoon in New York, yields were near lows last seen in mid-May.
The yield on the 10-year note fell to approximately 4.33%, a 16-basis point drop from Friday’s closing level, marking its biggest two-day drop since December. The April JOLTS job openings data showed the lowest levels in over three years, with the March figures also revised downward.
These developments have led traders to anticipate Federal Reserve interest-rate cuts as early as November. Fed officials will have a chance to shape these expectations following their next meeting, which ends on June 12. The US employment report for May, to be released on Friday, and the May inflation data will further inform their decisions.
“The market narrative has shifted from inflation concerns to growth concerns,” said Nicolas Trindade, senior portfolio manager at AXA Investment Managers. “This has made us more positive on US Treasuries.”
However, buyers remain cautious after last week’s selloff, which pushed yields to their highest levels in months due to faster-than-expected inflation data, challenging the outlook for Fed rate cuts.
Fed Chair Jerome Powell and other central bankers have emphasized the need for more evidence that inflation is on a sustained path to the 2% goal before reducing interest rates.
The job openings data “doesn’t indicate immediate action is needed, but it supports the case for a September cut,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets. The 10-year note’s yield could test 4.309%, the low end of its range since April 2. It dropped 11 basis points on Monday following a surprising decline in the Institute for Supply Management’s manufacturing index for May.
Money markets are now anticipating 44 basis points of easing by the Fed this year, equivalent to one quarter-point cut, compared to just 30 basis points of cuts last Wednesday, according to swaps. Traders on Tuesday resumed fully pricing in an initial cut in November; previously, December contracts were the first to fully price in a quarter-point move.
The declining price of oil also bolstered the appeal of bonds. WTI crude futures fell 1.3% to nearly a four-month low after OPEC+ announced plans to return barrels to the market sooner than expected, raising oversupply concerns.
“While the ISM data was the main catalyst for yesterday’s moves, they gained fresh momentum from the latest drop in oil prices,” said Deutsche Bank AG strategist Jim Reid. Oil prices have been trending lower since early April, amid easing geopolitical risks and weakening demand.
The gains in US Treasuries were mirrored in other bond markets. The German 10-year benchmark yield fell 13 basis points to 2.53%, days after hitting its highest level this year. While the European Central Bank is expected to cut rates by 25 basis points this week, there is uncertainty about further moves given persistent inflation.
“I don’t think they need to be cutting rates yet — the data isn’t really declining,” said Rob Burrows, portfolio manager at M&G Investments. “They seem to have boxed themselves into a corner. The first cut will likely be followed by hawkish rhetoric.”
Yields on Australian and New Zealand 10-year bonds fell about seven basis points, while Japan’s 10-year notes dropped three basis points to 1.02%.
“Levels had gotten cheap last week,” said Martin Whetton, head of markets strategy at Westpac Banking Corp. “Recently, it’s been challenging to achieve two consecutive days of gains for fixed-income markets, but we’ve just seen that.”
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