Benchmark 10-year note yields fell to three-month lows on Tuesday on concerns about slowing US economic growth as investors priced for the possibility that the Federal Reserve will cut interest rates as soon as March.
Weakening data and dovish comments from some Fed officials have sent yields tumbling, with 10-year yields dropping from 16-year highs reached in October.
Yields extended their fall on Tuesday after a report showed that US job openings hit a more than a 2-1/2-year low in October.
US data this week is being closely watched for new clues on the strength of the economy, with Friday’s jobs report for November the main focus. It is expected to show that employers added 180,000 jobs during the month.
“The market is comfortable with the idea that the economy is slowing, consumption’s facing headwinds, but they don’t know how much it’s going to slow,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.
“That’s why people are willing to price in a bit of a wild card potential for a Q1 rate cut – because the slowing might be more than expected,” Lyngen added.
Fed funds futures traders are pricing in a more than 50 percent probability that the Fed will begin cutting rates in March, and see 130 basis points in rate reductions by December 2024.
Tuesday’s data “added to beliefs that the labor market is cooling and that the FOMC is done hiking, with the next move a cut in coming months,” analysts at Action Economics said in a note.
Benchmark 10-year yields fell to 4.163 percent , the lowest since Sept. 1. The have tumbled from 5.021 percent on Oct. 23.
Thirty-year yields fell to 4.305 percent , the lowest since Sept. 8. Five-year yields reached 4.123 percent , the lowest since August 10.
Two-year yields got to 4.560 percent and are holding above the 4.540 percent level reached on Friday, which was the lowest since June 13.
The closely watched yield curve between two-year and 10-year notes reached minus 44 basis points, the most inverted in a week.
Yields tumbled last week after Fed governor Christopher Waller said that he is “increasingly confident” the current setting of the central bank’s benchmark interest rate will prove adequate to lower inflation to the Fed’s 2 percent target and nodded to possible rate cuts in a matter of months.
However, “Powell and other Fed speakers attempted to walk that back,” said Lyngen.
Fed Chairman Jerome Powell said on Friday that the risks of the Fed slowing the economy more than necessary have become “more balanced” with those of not moving interest rates high enough to control inflation, but also reiterated that it was still too early to declare the Fed’s inflation fight finished.
Fed officials are now in a blackout period ahead of the US central bank’s Dec. 12-13 meeting, where a key focus will be the updated projections of where Fed officials see rates at in 2024.
