The yield on US Treasury bonds is showing negative dynamics, as market participants continue to react to Friday's comments from Federal Reserve Chairman Jerome Powell, who gave his strongest indication yet that rate cuts are near.
The yield on 5-year Treasury bonds fell by 1.5 basis points, reaching 3.635%, while the yield on 30-year bonds was 4.08% (-2.2 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, fell by 1.7 basis points to 3.896%, while the yield on 10-year bonds fell to 3.791% (-1.6 basis points). The curve between the 10-year Treasury yield and the 2-year yield remains inverted, sending a warning that the economy may be falling or has already fallen into recession. Now the gap between 10 and 2 year U.S. debt is 11 basis points.
On Friday, Powell reinforced expectations of an interest rate cut at the Fed's September meeting, saying that “it's time for a policy adjustment.“ “Inflation has decreased significantly. The labor market is no longer overheated, conditions are now less tight than those that prevailed before the pandemic,” Powell said, stressing that although “the direction of movement is clear... the timing and pace of rate cuts will depend on incoming data, changing prospects and the balance of risks.”
Traders nevertheless remain dead set on a rate cut, according to the CME Group’s FedWatch Tool. Markets see a 38.5% probability of a 0.5% rate cut in September (up from 24% the week before), and a 61.5% probability of a 0.25% rate cut (down from 76.0% the week before), with a 1% rate cut expected by the end of the year.