Treasury yields slumped to the lowest levels in more than a week after bigger-than-expected declines in gauges of job creation and consumer confidence prompted bond traders to assign lower odds to another Federal Reserve interest-rate hike this year.
(Bloomberg) — Treasury yields slumped to the lowest levels in more than a week after bigger-than-expected declines in gauges of job creation and consumer confidence prompted bond traders to assign lower odds to another Federal Reserve interest-rate hike this year.
Short-maturity yields, more sensitive to changes in the Fed’s rate, led the move, with the two-year rate sliding as much as 13 basis points below 4.87%, the lowest for a security of that tenor since Aug. 11. The two-year note was sold via an auction on Monday that drew 5.024% and the rally in the sector was powered in part by a large block futures buyer in the aftermath of the data.
Benchmark yields were trading near their session lows late in New York and the rally was buoyed after solid demand for the Treasury’s $36 billion sale of seven-year notes at 1 p.m. in New York. While the sale was awarded at 4.212%, the highest yield on record in auctions since 2009, it was about 2 basis points below the pre-auction deadline level. Dealers were left with less than 10% of the sale, a lower than normal share and another sign of strong demand.
Swap contracts referencing Fed meeting dates repriced to levels consistent with lower odds of a rate increase this year and a greater chance of a rate cut in the first half of 2024. The November contract’s rate fell to 5.47%, pricing in about 56% probability of a quarter-point hike, down from about 75% earlier Tuesday.
Swaps for 2024 Fed meetings brought forward the expected start of rate cuts to June from July, with the market pricing in about 110 basis points of cuts by December next year versus an estimate of 95 basis points in rate cuts at the close Monday.
The bullish market reaction to the softer Job Openings and Labor Turnover Survey, or JOLTS, data reflects how the series has attracted the attention of Fed officials, who want to see a clear slowing in job creation to help bring down inflation. A closely watched metric of the survey, the “quits rate,” declined to 2.3%, the lowest level since January 2021.
The focus now shifts to the monthly payrolls report due Friday for confirmation of the hiring data. Employers are forecast to add 170,000 jobs in August, from a prior reading of 187,000.
The softer tone seen for job openings “still feels like it needs validation from the August payrolls data — not least because latest data is for the July JOLTS,” said Alan Ruskin, chief international strategist at Deutsche Bank. “But it does clearly show that the internal labor market dynamics are deteriorating, albeit from strong levels.”
Ben Jeffery, strategist at BMO Capital Markets, highlighted the lower quits rate as “another sign of softer labor demand” along with weaker-than-expected consumer confidence data for August.
“The combination the jobs data and consumer confidence has extended the rally significantly” in Treasuries, he wrote in a note.
Longer-dated yields declined to the lowest levels since the first half of August, with the 10-year falling as much as 9.8 basis points to 4.104%. But the front-end led the drop, with the two-year yield trading around 77 basis points above the 10-year, from around 85 basis points on Monday.
–With assistance from Edward Bolingbroke.
(Updates yields throughout)
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