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Treasury Yields Whipsawed as Fed Heads Back More Rate Cuts
(Bloomberg) -- Short-maturity Treasury yields were poised to end a volatile session lower after several Federal Reserve officials said they backed additional interest-rate cuts as soon as this month.
The two-year Treasury note’s yield declined as much as four basis points to 4.14%, last seen Nov. 4, reaching session lows in US afternoon trading after comments by Chicago Fed President Austan Goolsbee, the day’s third central bank speaker. Fed Chair Jerome Powell is slated to speak on Wednesday.
Yields across maturities rebounded from their lows, and most ended higher on the day, after a gauge of job openings signaled labor-market strength that could make the Fed less inclined to cut interest rates right away — especially if validated by Friday’s November employment report on Friday. Earlier, a South Korean political crisis briefly unleashed demand for haven assets including Treasuries.
“Having a range mentality in Treasuries is the way until you get clearer data trends,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. Treasuries are appealing as yields approach 4.5% and overvalued near 4%, he said.
Traders remain highly uncertain about the outcome of the Fed’s Dec. 17-18 meeting, which Fed officials have said will depend on economic data. The market-implied odds of a quarter-point December rate cut are around 65%, with about 80 basis points of easing priced in by the end of next year. The Fed cut rates by a half point in September and a quarter point last month.
As a result, the market has shown high sensitivity to comments and information that weigh in favor of either another cut or a pause in December. Treasury yields slid rapidly to session lows Monday after Fed Governor Christopher Waller said he leaned toward supporting another interest-rate cut this month.
Speaking Tuesday, San Francisco Fed President Mary Daly said a December rate cut would leave policy at restrictive levels. Fed Governor Adriana Kugler said inflation is still on a sustainable path lower. And Goolsbee reiterated he thinks rates are headed much lower.
Powell’s talk on Wednesday “will surely set the tone for the December rate decision,” John Ryding, chief economic advisor at Brean Capital, wrote in a note.
Against a backdrop of easy financial conditions, Fed officials have characterized their rate cuts as intended to prevent the labor market from weakening, now that inflation has slowed to levels approaching their 2% target.
October JOLTS job openings released Tuesday rose more than anticipated, however. Friday’s November employment report is expected to show a rebound in job creation from October’s, which was depressed in some states by hurricanes and strikes.
Interest-rate strategists at JPMorgan Chase & Co., who had recommended buying two-year Treasuries in mid-November, advised taking profits on the trade in anticipation that the jobs report will show job growth exceeding the consensus forecast.
Bond investors also are wrestling with the implications of tariffs, tax cuts and mass deportations that President-elect Donald Trump, who takes office in January, campaigned on.
Strategists at Deutsche Bank AG are recommending positioning for higher short-term interest rates, expecting “higher potential growth and higher neutral rates,” Steven Zeng said. Longer-term rates could benefit from seasonal demand for bonds at the end of the calendar year, however, he said.
Treasury yields reached session lows in early US trading after South Korea’s president declared martial law in a live-televised address that tanked the won. Meanwhile, turmoil in France intensified with far-right leader Marine Le Pen expected to join forces with a left-wing coalition to topple the government.
The yield declines were erased before midday in New York after South Korean lawmakers voted to request lifting martial law.
--With assistance from Ye Xie.
(Adds comments and context throughout and updates yield levels.)