Two- through 30-year Treasury yields fell Tuesday morning after weak international trade data from China raised concerns about slowing global economic growth and encouraged buying of sovereign bonds.
The yield on the 2-year Treasury
was marginally lower at 4.754% versus 4.756% on Monday.
The yield on the 10-year Treasury
retreated 6.8 basis points to 4.008% from 4.076% Monday afternoon
The yield on the 30-year Treasury
fell 7.1 basis points to 4.185% from 4.256% late Monday.
What’s driving markets
Data showed that China’s exports fell by more than expected in July, increasing fears of a global economic slowdown and sparking a move into government bonds.
In U.S. economic updates on Tuesday, U.S. trade with the rest of the world cooled in June as imports fell.
Meanwhile, Philadelphia Fed President Patrick Harker said the central bank could be at the point where it doesn’t need to raise interest rates further. His colleague, Richmond Fed President Tom Barkin, said easing inflationary pressures could help stave off a widely predicted U.S. recession.
Looming on the horizon is the U.S. July consumer price index report, due on Thursday, which will help determine how the Fed should proceed.
Markets are pricing in an 86.5% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool. The chances of a 25 basis point rate hike to a range of 5.5-5.75% at the subsequent meeting in November is priced at 24.6%.
The central bank is mostly expected to take its Fed funds rate target back down to around 5% or lower by March or May.
On Tuesday, Treasury will auction $42 billion of 3-year notes at 1 p.m. Eastern time. Traders will be eager to see how readily the market is able to absorb this week’s total of $103 billion of sales in 3-, 10- and 30-year securities, as part of the government’s $1 trillion borrowing need for the third quarter.
What analysts are saying
The swift sell-off in U.S. debt markets last week caught investors off-guard, according to UBS. However, the real surprise came in the shape of the yield curve.
“While we anticipated a steepening of the curve in [the second half of 2023], we believe most of the recent move is a knee-jerk reaction to the unanticipated supply hitting the market,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management. “The 2-year/10-year curve has steepened nearly 35bps in the past two weeks to –71bps, but given our ‘higher for longer’ view on rates, we do not anticipate an upward sloping yield curve until 2024. We continue to anticipate slower growth in the second half of 2023, alongside lower 10-year yields by year-end to around 3.5%.”