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Bond Report: Treasury yields fall in choppy trade to start August

Long-dated Treasury yields fell Monday as investors weighed prospects for recession and the pace and scope of future Fed rate increases.

What yields are doing

The 2-year Treasury note yield

rose 1.2 basis points to 2.909% at 3 p.m. Eastern. Yields and debt prices move opposite each other.

The yield on the 10-year Treasury note

fell 3.7 basis points to 2.605%.

The 30-year Treasury bond

yield declined 5.2 basis points to 2.924%.

What’s driving the market

Traders continued to assess the possibility that rising fears of a recession will force the Federal Reserve to back off its aggressive rate hike campaign. As of Monday, fed funds futures implied a 70% likelihood that policy makers will raise their main policy rate target by just 50 basis points, to between 2.75% and 3%, in September. The 2-year yield continued to trade above the 10-year rate, leaving the spread between the two at minus 26 basis points — a reliable recession warning signal.

The Fed ended its two-day policy meeting last Wednesday with another 75-basis-point rate hike in an effort to curb soaring inflation. Fed Chair Jerome Powell said that another 75 basis-point move could be appropriate in September but that the Fed would take a data-dependent, meeting-by-meeting approach to decisions.

Powell also warned that the economy would need to see a period of below-trend growth to rein in red-hot inflation and that the path to a so-called soft landing for the economy continued to be narrow.

Federal Reserve Bank of Minneapolis President Neel Kashkari said Sunday that the central bank is still committed to its goal of 2% inflation. However, “we are a long way away” from that goal, he said in an interview on CBS News’ “Face the Nation.”

Meanwhile, investors will be paying close attention to economic data, culminating in Friday’s July jobs report. Nonfarm payrolls and other employment data will be parsed for signs a still strong labor market is beginning to show cracks.

On Monday, the Institute for Supply Management’s closely watched manufacturing production index dipped in July, while the final July reading of the S&P manufacturing purchasing managers index came in at 52.2 vs an initial 52.3 reading.

The Treasury Department on Monday said it expects to borrow $444 billion in privately held net marketable debt during the July-September 2022 quarter, assuming an end-of-September cash balance of $650 billion. The borrowing estimate is $262 billion higher than announced in May 2022, primarily due to changes to projections of fiscal activity and the estimated impact of Federal Reserve System Open Market Account, or SOMA, redemptions of $120 billion, the department said.

During the October-December 2022 quarter, Treasury said it expects to borrow $400 billion in privately held net marketable debt, assuming an end-of-December cash balance of $700 billion, including the impact of an estimated $139 billion in SOMA redemptions. Details of Treasury’s quarterly refinancing plan will be released Wednesday morning.

What analysts say

“The bulls are convinced the Fed is nearing the end of the tightening cycle, and the resulting equity and bond market rallies simply delay the difficult decision companies are going to have to make on firing workers they had such a difficult time attracting them in the first place. This means the Fed tightening cycle will likely go on much longer than what is currently being discounted,” said Steven Ricchiuto, U.S. chief economist at Mizuho Securities, in a Monday note.

“We see the rate cuts being anticipated in 2023 as completely unlikely, and we expect upcoming evidence that the labor market is still expanding and core inflation remains very sticky as setting the stage for markets to recalibrate expectations,” he wrote.

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