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Bond Report: Treasury yields drift lower, sending 10-year rate below 2.8%, to kick off week

Treasury yields fell Monday after U.S. economic data fell short of expectations and unexpected signs of slowing in China’s economy stirred fears about a global slowdown.

What yields are doing

The yield on the 2-year Treasury note

fell 5.6 basis points to 3.166% at 3 p.m. Eastern. Yields and debt prices move opposite each other.

The 10-year Treasury note yield

dropped 5.8 basis points to 2.79%.

The 30-year Treasury bond

yielded 3.096%, down 2.1 basis points.

What’s driving the market

In data released on Monday, the New York Fed’s Empire State manufacturing index, a gauge of manufacturing activity in the state, plummeted in August, while a home-builder’s sentiment index fell 6 points to 49, the first time it’s been below break-even since May 2020. This week’s economic calendar also features July retail sales and minutes of the Fed’s July policy meeting on Wednesday.

Disappointing economic news out of China, with nearly all key indicators missing forecasts, contributed to a more cautious tone across financial markets.

The People’s Bank of China said it lowered interest rates of both one-year medium-term lending facility and seven-day reverse repurchase agreements by 10 basis points while injecting liquidity via the two instruments. The one-year MLF rate was lowered to 2.75% and the seven-day reverse repo rate was cut to 2.0%, the PBOC said.

Treasury yields had risen modestly last week as investors weighed data that showed a cooling of U.S. inflation pressures. Though inflation continues to run far above the U.S. central bank’s target, investors have scaled back expectations around the size of the Federal Reserve’s next rate hike.

What analysts say

“The front end of the U.S. curve prices 25bp (basis points) more in Fed hikes than it did at the end of July, but a 3.5-3.75% peak funds rate still seems modest and the turn in rates after Q1 next year will only happen if the yield curve is 100% right in warning of upcoming recession,” said Kit Juckes, global macro strategist at Société Générale.

“My concern now is that the path of least resistance is for the front end of the U.S. rates market to price in more, as Fed officials have no choice but to sound tough in the face of a very, very tight labour market and far too-high inflation,” he said.

Hear from Ray Dalio at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. The hedge-fund pioneer has strong views on where the economy is headed.

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