Treasury yields fell early Tuesday as a trio of factors were seen boosting the attraction of U.S. government debt.
What’s happening
- The yield on the 2-year Treasury BX:TMUBMUSD02Y fell by 2.9 basis points to 5.033%. Yields move in the opposite direction to prices.
- The yield on the 10-year Treasury BX:TMUBMUSD10Y retreated 6.9 basis points to 4.827%.
- The yield on the 30-year Treasury BX:TMUBMUSD30Y fell 7.8 basis points to 4.973%.
What’s driving markets
The 10-year Treasury yield moved to the bottom of a 20-basis point range between roughly 4.82% and 5.02% within which it has fluctuated for about two weeks.
A number of factors were seen seen supporting prices and suppressing yields. News that China’s manufacturing sector slipped back into contraction in October added to concerns about global economic strength and encouraged buying of fixed income assets.
Next, the announcement Monday that the U.S. Treasury was planning to borrow less than expected this quarter and would thus have to issue less paper was also seen underpinning bond prices. The Treasury will announce its third-quarter refunding program on Wednesday.
Finally, the Bank of Japan delivered on Tuesday only a minor tweak to its ultra-loose monetary policy, encouraging the assessment that interest rates in Japan will stay low for longer. With 10-year Treasurys yielding about 390 basis points more than their Japanese peers BX:TMBMKJP-10Y, investors responded to hopes U.S. paper will remain relatively more attractive for an extended period.
All this comes as the Federal Reserve on Tuesday starts its two-day monetary policy meeting.
Markets are pricing in a 98% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% on Wednesday, 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 December is priced at 24.5%. The central bank is not expected to take its Fed funds rate target back down to around 5% until August 2024, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Tuesday include the third-quarter employment cost index, released at 8:30 a.m. Eastern, the August S&P Case-Shiller home price index at 9 a.m., and consumer confidence for October at 10 a.m..
What are analysts saying
“The Treasury’s decision to cut its quarterly borrowing estimate could be considered a promising development, especially as it comes just before the critical refunding announcement tomorrow,” said Stephen Innes, managing partner at SPI Asset Management
“Indeed, this should offer stocks and forex markets a fraction of breathing room as traders will not have to deal with such a steep maturity wall; hence, yields might not rise too much more, all things being equal,” Innes added.