Bond Report: Treasury yields fall following weak European data


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Bond yields fell on Wednesday after data showed weakening economic activity in Europe.

What’s happening

  • The yield on the 2-year Treasury
    fell 4.7 basis points to 5.010%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    retreated 6.4 basis points to 4.265%.

  • The yield on the 30-year Treasury
    fell 4.8 basis points to 4.356%.

What’s driving markets

A batch of poor economic data out of Europe was forcing government bond yields sharply lower early Wednesday.

The eurozone composite purchasing managers index survey — which combines reports from the services and manufacturing sectors — showed activity fell in August to its lowest in 33 months. A similar survey for the U.K. also surprised by showing activity at a 31-month trough.

German 10-year bund yields
the continent’s benchmark, plunged 10.1 basis points to 2.539%, while equivalent duration U.K. gilt yields
slid 15 basis points to 4.504% as traders pared back expectations for further interest rate rises by the European Central Bank and Bank of England.

U.S. Treasury yields fell in sympathy ahead of the S&P services and manufacturing PMIs for August, due at 9:45 a.m., followed at 10 a.m. Eastern by the July new home sales report.

Investors will be keen to see whether the signs of a slowdown in the European economy impact the thinking of the Federal Reserve when Chair Jerome Powell gives a speech on Friday at the Jackson Hole symposium.

Until then, markets are pricing in an 87% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on September 20, according to the CME FedWatch tool.

The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in November is priced at 38%.

The central bank is not expected to take its Fed funds rate target back down to around 5% until July 2024, according to 30-day Fed Funds futures.

The Treasury will sell $16 billion of 20-year notes on Wednesday.

What are analysts saying

“Before the anticipated Jackson Hole at the end of the week, the U.S. Treasury will sell 20-year U.S. Treasuries today and 30-year TIPS tomorrow. Both maturities are usually disliked by investors, especially the 20-year notes, which have been re-introduced recently after the pandemic,” said Althea Spinozzi, senior fixed income strategist at Saxo Bank.

“The focus is going to be on both auctions’ bidding metrics and whether demand remain strong despite the recent increase in supply, coupled with QT and a retreat of Japanese investors home. U.S. Treasury yields remain in an uptrend, and…higher yields may be in the cards with 10-year yields aiming to 4.5% and 30-year yields going to 4.65%,” Spinozzi added.

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Alexandra Williams
Alexandra Williams
Alexandra Williams is a writer and editor. Angeles. She writes about politics, art, and culture for LinkDaddy News.

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