Yields drop as bond market anticipates dovish Fed tilt 

NEW YORK – US Treasury yields fell on Tuesday for a fourth straight session as data reinforced expectations the Federal Reserve will cut interest rates next month, with the rally accelerating on a report that White House economic adviser Kevin Hassett has emerged as the leading contender to become the next Fed chair.

Some of the economic data releases, including retail sales and producer prices data for September, had been delayed by the 43-day government shutdown, leaving some investors skeptical about their reliability in providing a picture of US economic health. Others saw the figures as confirming a general trend of slowing economic momentum, with price pressures remaining sticky.

“There’s no real trade here, because this September data is not going to change the picture much here,” said Slawomir Soroczynski, head of fixed income at Crown Agents Investment Management.

US retail sales rose 0.2% in September, slowing from August’s unrevised 0.6% gain and coming in below economists’ expectations for a 0.4% increase, the Commerce Department said on Tuesday.

Separately, the Labor Department reported that the Producer Price Index for final demand increased 0.3% in September, in line with forecasts, following an unrevised 0.1% decline in August. On a year-on-year basis, the PPI rose 2.7%, matching August’s increase.

“It’s not just that (the data) is old, it really wasn’t much of a surprise to move the needle,” said Jack Ablin, chief investment strategist at Cresset. “In fact, in many respects, it confirmed what a lot of economists and investors suspect, and that is that spending is weakening, but prices are still pretty persistent,” he added.

DOVISH TILT, STEEPER CURVE

A Bloomberg news report that Hassett could replace Jerome Powell when his Fed chairmanship ends in May next year boosted expectations of a dovish Fed tilt, even if the White House said any discussion on the new chair remained speculative until a final decision.

The yield curve steepened on the news, said Tom di Galoma, managing director at Mischler Financial Group. “The market rallied, and the front end led … he (Hassett) has been saying over and over that rates are too high.”

US Treasury Secretary Scott Bessent said on Tuesday he was concluding a second round of interviews later in the day for a new Fed leader, and there was a good chance President Donald Trump would announce his pick before Christmas.

Rates future traders were assigning an 85% probability to an interest rate cut by the Fed next month, in line with Monday and up from 50% a week ago, CME Group data showed.

The rate cut expectations had gained consensus after comments from Fed officials in recent days favoring further easing by the central bank.

Benchmark 10-year yields were last at 4%, over three basis points lower than on Monday and at their lowest in almost one month. They went below 4% during the session for the first time since late October.

Two-year yields, which more closely reflect market expectations on changes in monetary policy, were last at 3.461%, over four basis points lower on the day and at their lowest since October 24.

The curve comparing two- and 10-year yields steepened to 54 basis points from 53 on Monday, due to two-year Treasuries rallying more than the 10-year securities.

FIVE-YEAR AUCTION TAILS

A USD 70 billion five-year notes auction on Tuesday was met with tepid demand, partly because it came after the rally extension triggered by the Hassett headline, said di Galoma at Mischler.

The notes were sold with a high yield of 3.562%, which BMO Capital Markets said was half a basis point above the market at the bidding deadline, indicating investors demanded a small premium to absorb the issuance.

(Reporting by Davide Barbuscia, Editing by Nick Zieminski)