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U.S. bond yields turned lower on Tuesday after new home-sales data and other economic reports missed expectations and had investors readjusting their expectations for Federal Reserve interest rate hikes.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
3.280%
was 3.243% versus Monday’s level of 3.335%. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.015%
was down at 2.983% from 3.035% on Monday afternoon. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.230%
dropped to 3.202% from 3.241% on Monday.
What’s driving markets
Tuesday’s economic data showed that new home sales plunged 12.6% to a seasonally-adjusted rate of 511,000 in July, the lowest level since January 2016 and below economists’ median expectation. The report was accompanied by the S&P Global purchasing managers’ manufacturing and services indexes, which each dropped in August, to 51.3 and 44.1 respectively, as businesses grew more slowly.
The disappointing data changed the tone in the bond market, sending yields lower across the board.
Most bond yields were still above 3%, however, with some traders expecting Fed Chair Jay Powell to ram home his colleagues’ hawkish message when he speaks at the central bank’s Jackson Hole symposium on Friday. A flurry of Fed officials in recent weeks have reiterated that they will persevere in the battle to push inflation, currently 8.5%, down to the target of 2%.
Read: Why the 10-year yield topping 3% can hurt stocks
Nonetheless, markets are now pricing in a 55.5% probability that the Fed will raise interest rates by 50 basis points to a range of 2.75% to 3% at its Sept. 20-21 meeting, shifting away from previous better-than-not expectations for a 75-basis-point hike. Traders also see a more than 50% chance that the central bank will take its borrowing costs to at least between 3.5% and 3.75% by next March, according to the CME FedWatch Tool.
On Monday, the 2-year yield had hit its highest level since June 14, while the 10- and 30-year rates reached their highest in a month or more based on expectations that the Fed may be more hawkish in its monetary policy tightening than previously thought.
The U.S. Treasury will auction $44 billion of 2-year bonds at 1 p.m. Eastern. The Fed’s preferred inflation measure, the PCE price index, will be published on Friday.
What analysts are saying
“We are looking for a hawkish message this week from the Fed’s Jackson Hole,” said trader Tom di Galoma of Seaport Global Holdings. “I look for the Fed to raise rates 75bps at the September 21st Fed meeting” and hold off on hikes on Nov. 2 due to U.S. mid-term elections on Nov. 8, he wrote in a note.
Hear from Ray Dalio at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. The hedge-fund pioneer has strong views on where the economy is headed.
