US yields decline as economic data points to moderate slowdown

NEW YORK, June 28 – US Treasury yields declined slightly on Thursday after economic data showed a continued, though moderate, slowdown in economic activity.

The Commerce Department’s Bureau of Economic Analysis released estimates showing gross domestic product increased at a revised 1.4% annualized rate last quarter, up from a previous 1.3% estimate. Real consumption growth was revised down to 1.5% from 2%, indicating a slowdown in consumer spending due to a combination of high interest rates and sticky price pressures.

“The 1.4% reading is solid, but indicates that economic growth is slowing, although still comfortably above recession levels,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in a note. Growth was 3.4% in the fourth quarter last year.

Data on Thursday also showed first-time applications for U.S. unemployment benefits drifted lower last week, which could assuage concerns over a material deterioration in the labor market. At the same time, so-called continuing claims for unemployment benefits increased 18,000 to a seasonally adjusted 1.839 million during the week ending June 15, the highest since November 2021.

Benchmark 10-year yields, which move inversely to prices, dropped after the data and were last at 4.288%, three basis points lower than on Wednesday. Two-year yields, which more closely indicate monetary policy expectations, were also down about three points to 4.716%.

Yields edged lower also after a USD 44 billion seven-year Treasury note auction, which saw solid investor demand. The notes were sold at a high yield of 4.276%, slightly below the expected rate at the time of the bid deadline, a sign that investors were willing to pay up.

Still, Treasury yields remained overall in line with recent levels, as investors weighed signs of the economy slowing against a number of factors, including the rising U.S. government debt burden, that could delay a much anticipated shift by the Federal Reserve to a less restrictive stance.

“You can find weakness in a lot of economic data … but yields can’t seem to break 4.2%,” said Craig Brothers, senior portfolio manager and head of fixed income at Bel Air Investment Advisors, referring to 10-year bonds.

That was due to large amounts of debt supply, as well as the slow decrease in inflationary pressures, he said. “As much as the Fed wants everyone to feel great that we’re making progress towards their target of 2% (inflation), I don’t think we’re going to get there very easily.”

Kathryn Rooney Vera, chief market strategist at StoneX, said unless price pressures drop sharply over the coming months, the Fed is unlikely to lower rates until December.

“I don’t think this combination of data says deceleration and the Fed is going to start cutting,” she said.

Investors on Thursday were pricing for nearly two 25 basis point rate cuts this year, but they will be looking for more clues on the path of interest rates with the release of personal consumption expenditure inflation data on Friday.

Also on investors’ radars will be a face-off between US President Joe Biden and Republican former president Donald Trump in a TV debate later on Thursday.

“If Trump does well … (and) it becomes clearer that one party is going to be able to control the presidency and the Congress, then I think Treasury yields will probably move higher,” said Brij Khurana, fixed income portfolio manager at Wellington Management.

Reporting by Davide Barbuscia; Editing by Bernadette Baum and Josie Kao

Wall Street closes subdued as investors sit, wait for inflation data

June 27 (Reuters) – US stocks ended Thursday around the unchanged mark as investors awaited fresh inflation data, with the Nasdaq able to eke out a slight gain after economic data showed a continued slowdown in economic activity, raising investors’ hope for rate cuts.

“The market is in a bit of a holding pattern here for the PCE because there hasn’t been a lot of big catalysts,” said Ross Mayfield, investment strategy analyst at Baird, about the release of the monthly personal consumption expenditures (PCE) price index – the Federal Reserve’s preferred inflation gauge – on Friday.

Data showed new orders for key US-manufactured capital goods unexpectedly fell in May, while core durable goods orders fell 0.1% versus forecasts for a 0.2% rise, boosting investor beliefs that a weaker economy could prompt the Federal Reserve to cut interest rates in September.

Weekly jobless claims fell to 233,000, missing expectations of 236,000. Further, a final print showed the US economic growth increased more than estimated in the first quarter.

Benchmark 10- and 2-year yields, which move inversely to prices, dropped after the data showed a continued, but moderated slowdown in economic activity, while the 7-year yields edged lower after a USD 44 billion auction.

Megacap stocks, such as Alphabet and Meta Platforms, firmed as US Treasury yields slipped. Amazon.com rose after hitting USD 2 trillion in market value for the first time on Wednesday.

According to preliminary data, the S&P 500 gained 5.44 points, or 0.07%, to end at 5,483.34 points, while the Nasdaq Composite gained 51.99 points, or 0.30%, to 17,857.14. The Dow Jones Industrial Average rose 42.07 points, or 0.11%, to 39,169.87.

Micron fell after an in-line fourth-quarter revenue forecast disappointed investors hoping for more upside from the memory chipmaker’s performance in the artificial intelligence boom.

Nvidia fell, continuing its recent turbulent ride.

Walgreens Boots Alliance slumped after cutting its 2024 profit forecast and announcing plans to close more underperforming US stores.

Denim maker Levi Strauss tumbled after falling short of expectations for second-quarter revenue.

With a handful of expensive heavily weighted stocks supporting Wall Street’s ascent since the last leg of 2023, market participants have highlighted concerns over the rally’s sustainability and have called out for the need to diversify portfolios to hedge against possible sharp losses.

Meanwhile, investors have largely stuck to their view of around two rate cuts this year, as per LSEG’s FedWatch data, even though the Fed has projected only one, and a 59.5% chance of a cut in September.

In a policy essay, Atlanta Fed President Raphael Bostic said inflation “appears to be narrowing” and that should allow rates cuts later this year, while governor Michelle Bowman reiterated that she is still not ready to support a central bank rate cut with inflation pressures still elevated.

“What we’ve been looking forward for most of the week is kind of that preponderance of evidence to tip the scales on what is the direction for inflation,” said Rob Haworth, senior investment strategist at US Bank Wealth Management.

Reporting by Ankika Biswas and Lisa Mattackal in Bengaluru; Editing by Maju Samuel and Aurora Ellis

Oil settles USD1 up, war risk premium outweighs ample US stocks

HOUSTON, June 28 – Oil futures settled higher on Thursday on worries about global crude supply disruptions as geopolitical pressure in the Middle East and Europe mounted, while a surprise increase in US crude and gasoline inventories gave prices a ceiling.

Brent crude oil futures settled up USD 1.14, or 1.34%, to $86.39 a barrel. US West Texas Intermediate crude futures CLc1 settled up by 84 cents, or 1.04%, at USD 81.74.

WTI futures also rose by more than $1 a barrel earlier in the session.

Cross-border strains between Israel and Lebanon’s Hezbollah have been escalating, fanning fears that a widening war could draw in other countries including major oil producer Iran.

The French foreign ministry said France is extremely concerned about the situation in Lebanon and called for restraint.

Any contagion could have a big impact on crude supplies from the Middle East, said Panmure Gordon analyst Ashley Kelty.

Turkish President Tayyip Erdogan said his country stood in solidarity with Lebanon and called on the region’s countries to show support.

Israel stormed a neighbourhood in Gaza City, telling Palestinians they must head south.

Israeli forces also bombed the southern city of Rafah in what it called final stages of an operation against Hamas militants.

Yemen’s Houthis targeted “vessel Seajoy” in the Red Sea with a drone boat and a number of missiles and drones, the Iran-aligned group’s military spokesman Yahya Saree said.

The Houthi militia, which controls the most populous parts of Yemen, has staged attacks on ships in the waters off the country for months in solidarity with Palestinians fighting Israel in Gaza.

In Europe, Russia is considering a possible downgrade of relations with the West due to deeper involvement of the US and its allies in the Ukraine war, but no decision had yet been made, the Kremlin said.

Downgrading relations – or even breaking them off – would illustrate the gravity of the confrontation between Russia and the West over Ukraine following escalating tensions surrounding the war in recent months.

The US Energy Information Administration (EIA) reported a 3.6 million-barrel weekly jump in crude oil stocks. Analysts polled by Reuters had expected a drawdown of 2.9 million barrels.

“Yesterday’s EIA report is still an overhang for the market today as it was a surprise in terms of the builds we saw, and the refinery run rates,” said John Kilduff, partner at Again Capital.

US gasoline stocks rose by 2.7 million barrels. Analysts had expected a 1 million-barrel draw.

“We are right now at the peak of the summer driving season, approaching July 4 weekend, so for markets to be moving sideways now, then we may well even see a dip after the holiday weekend,” said Tim Snyder, economist at Matador Economics.

In Europe, independently held gasoline stocks in storage in the Amsterdam-Rotterdam-Antwerp (ARA) refining and storage hub rose by over 9% in the week to Thursday, data from Dutch consultancy Insights Global showed, suggesting limited scope for transatlantic US gasoline demand.

Meanwhile, comments from Atlanta Fed President Raphael Bostic in a policy essay released on Thursday reiterated expectations of an interest rate cut in the fourth quarter of this year, in line with investors’ expectations of cuts starting in September.

“There is certainly nothing we can hang our hats on in terms of the Fed looking to juice the markets again,” Again Capital’s Kilduff said.

Reporting by Georgina McCartney in Houston, Noah Browning in London and Arunima Kumar in Bengaluru
Additional reporting by Yuka Obayashi in Tokyo and Jeslyn Lerh in Singapore. Editing by David Goodman, David Gregorio and Matthew Lewis

Tokyo inflation, scores on the first half doors

June 28 – A look at the day ahead in Asian markets.

A mood of caution hangs over Asian markets on Friday, the last trading day of the quarter and half-way point in the year, with investors likely to keep risk exposure to a minimum ahead of U.S. inflation data later in the day and ahead of the weekend.

That wariness may be enforced by headlines from the U.S. presidential debate between Joe Biden and Donald Trump late on Thursday, particularly on trade protectionism and tariffs on imports from China.

Friday’s Asian economic calendar is packed with top-tier releases, including: Tokyo inflation, Japanese unemployment and industrial production, South Korean industrial output and retail sales, and trade and current account figures from Thailand.

Top among them is probably Tokyo inflation, which will give an insight into wider price pressures in Japan and what the Bank of Japan might do at its July 30 to 31 policy meeting.

Pressure is mounting on the BOJ to raise rates again or taper its bond purchases, if for no other reason than to cool some of the selling pressure on the yen and lift the currency from the 38-year low it hit against the dollar this week.

Policymakers have warned that tightening policy too much could harm consumer spending and economic growth. But they also continue to express their displeasure with the yen’s relentless depreciation.

They can’t have it both ways.

Japanese authorities have not yet intervened to support the yen this time around, but traders will be on high alert for action, especially in the least liquid parts of the global trading day.

Economists polled by Reuters reckon core Tokyo inflation edged up to 2.0% in June from 1.9% in May. Officials would probably be comfortable with that, but so might yen bears, and renewed selling is bound to sound the intervention alarm.

China’s currency, meanwhile, also reaches the mid-year point on the defensive, and on Thursday slipped to a new low for the year. Chinese stocks are in a similar boat, hugely underperforming their regional and global peers.

The wider mid-year report card in Asia is mixed. Japan’s Nikkei massively outperformed, in large part thanks to the weak yen, Japanese bond yields have hit multi-year highs, but the specter of deflation has pushed Chinese bond yields to historic lows.

Most currencies are down against the U.S. dollar although nowhere near as much as the yen. The Indonesian rupiah is at multi-year lows, while India’s rupee is at a record low but spared further weakness by official intervention.

A snapshot of M&A activity in the January-June period on Thursday may be more revealing about investor sentiment across the continent. LSEG data shows that the value of announced transactions dropped 25% year-on-year to $317.5 billion, and M&A fees fell to $1.5 billion.

Both are the lowest in 11 years.

Reporting by Jamie McGeever; Editing by Josie Kao

Oil settles slightly up as global supply risks offset US demand concerns

NEW YORK, June 27 – Oil prices settled slightly higher on Wednesday despite a surprise jump in U.S. gasoline supplies, as investors worried that a potential expansion of the Gaza war could disrupt crude supplies from the Middle East.

Brent crude futures rose 24 cents, or 0.3%, to settle at USD 85.25 per barrel. US West Texas Intermediate crude futures settled 7 cents higher at USD 80.90 a barrel.

Cross-border strains between Israel and Lebanon’s Hezbollah have been escalating in recent weeks, stoking fears of an all-out Israel-Hezbollah war that could draw in other regional powers, including major oil producer Iran.

“The geopolitical risk premium has been coming back to the market as a war between Israel and Lebanon is likely to see direct involvement of Iran, that would be a concern,” Andrew Lipow of Houston-based Lipow Oil Associates said.

Turkish President Tayyip Erdogan said his country stood in solidarity with Lebanon and called on regional countries’ support.

Houthi attacks on shipping in the Red Sea have supported oil prices. The group said it targeted a ship in Israel’s Haifa port with a number of drones in a joint military operation with the Islamic Resistance in Iraq.

Early in the session, oil prices fell after the US Energy Information Administration (EIA) reported a 3.6 million barrel jump in the country’s crude oil stocks last week, surprising analysts polled by Reuters who had expected a drawdown.

US stockpiles are rising while inventories elsewhere are declining, UBS analyst Giovanni Staunovo noted.

“I would call the oil market a tale of different stories,” Staunovo said. “We saw oil inventory draws in Japan and Europe last week. So it seems the market is tightening, just not yet in the US.”

UBS expects oil prices to rise in coming weeks.

Oil traders have worried about weak U.S. gasoline consumption during the country’s peak summer driving season.

US gasoline use represents around 10% of total world oil consumption, and gasoline demand in the country last week was down 3.6% from a year ago to around 8.9 million barrels a day. Stocks of the fuel rose unexpectedly even as refiners cut back output.

“These statistics are certainly going to disappoint the gasoline bulls,” Lipow said. “Absent a hurricane, we have adequate supplies for the summer driving season with July 4th right around the corner.”

Reporting by Shariq Khan in New York, Robert Harvey and Alex Lawler in London, Arunima Kumar in Bengaluru; Additional reporting by Emily Chow and Trixie Yap in Singapore; editing by Louise Heavens, Jason Neely, Sharon Singleton and David Gregorio

US yields drift higher amid Japan FX intervention worries

NEW YORK, June 27 – US Treasury yields rose on Wednesday amid a pickup in inflation in other countries, fears of intervention from Japanese authorities to boost the yen, and worries around liquidity at the end of the month.

Higher-than-expected inflation in Canada lifted US yields on Tuesday. On Wednesday it was the turn of Australia, where consumer inflation accelerated to a six-month high in May catching traders off-guard and prompting markets to raise the chances of another interest rate hike this year.

Given the lack of significant US economic data on the calendar on Wednesday, yields were also drifting higher ahead of government issuance of USD 70 billion in five-year notes, part of $183 billion in total coupon debt sales by the Treasury this week. Ultimately, however, the debt sale saw solid demand, analysts said, with the Treasury issuing the paper at a high yield of 4.331%, below the expected rate at the time of the bid deadline, a sign that investors were willing to pay up.

“A lot of investors are trying to participate in auctions because it’s a way to get quite a bit of bonds on their books without materially exposing themselves to liquidity constraints,” said Gennadiy Goldberg, head of US rates strategy at TD Securities USA.

Five-year yields rallied after the auction, although they still ended up adding nearly eight basis points on the day to 4.339%.

In Japan, the yen dropped to its lowest level since 1986 against the dollar, sparking concerns there would be another intervention from Japanese authorities to boost the currency.

“Markets are a little bit worried about Japan having to sell Treasuries to intervene in the foreign exchange market, which would push rates a little bit higher,” said Goldberg.

Meanwhile, as the end of the month and the quarter approaches, liquidity in money markets could become challenging as dealers close their books, pressuring Treasuries.

“There’s a bit of concern about what happens in repo (repurchase agreements) heading into month end, may be some pressures there,” said Subadra Rajappa, head of US rates strategy at Societe Generale.

On the monetary side, Fed officials reiterated this week that more inflation data is needed for the central bank to move to a less restrictive stance.

On Wednesday, traders of futures contracts tied to the policy rate were betting on a total of 44 basis points in rate cuts for 2024. Personal consumption expenditures inflation data on Friday will be a key factor for investors to assess the extent of any rate cuts this year.

Benchmark 10-year yields were up about eight basis points to 4.316%% and 30-year yields added seven points to 4.447%. Two-year yields, which tend to more closely reflect monetary policy expectations, were nearly two points higher at 4.749%.

The gap between two- and 10-year yields remained deeply negative at about minus 43 basis points, but smaller than on Tuesday, when it hit its widest since December at minus 51.6 basis points.

An inversion in that part of the yield curve, which occurs when shorter-dated Treasuries yield more than longer-dated ones, is closely watched by investors as it has historically signalled a recession is coming.

Reporting by Davide Barbuscia; Editing by Anil D’Silva and Nick Zieminsk

European shares slip as bond yields weigh, French elections awaited

June 27 – European shares slipped on Wednesday as government bond yields rose on concerns about persistent global price pressures ahead of a crucial U.S. inflation report, with investor focus also on French elections at the weekend.

The pan-European STOXX 600 index reversed early gains to close nearly 0.6% lower, pressured by a rise in bond yields across the euro zone.

The yield on the benchmark German 10-year Bund was last at 2.452%.

Reports showing a rise in inflation in Australia and Canada have added to market jitters that interest rates will stay elevated for longer than expected.

“The bond market is causing risk sentiment to fade as inflation concerns rise once more,” said Kathleen Brooks, research director at XTB.

“Australia now has the highest rate of inflation in the developed world and the markets are fearful that this is a sign that inflation could rise once more and derail interest rate cut hopes.”

Rate-sensitive real estate share gauge was among the top drags on the benchmark index, down 1.2%, while travel and leisure stocks led sectoral declines with a 1.7% fall.

Auto stocks lost 1.3%, with Europe’s largest carmaker Volkswagen slipping 1.6% after the company said it would invest up to USD 5 billion as part of a joint venture with electric vehicle maker Rivian

Focus remained on a US personal consumption expenditures (PCE) reading due on Friday, which could play a key role in gauging the Federal Reserve’s interest rate outlook.

“Recent comments from (Fed) members suggest they want to wait and see a more consistent sustained trend in low inflation,” Daniel Morris, chief market strategist at BNP Paribas Asset Management said. He added that one month’s data would not imply much and the Fed may want to be past the U.S. election before taking any decisions.

Inflation data from France, Spain and Italy are also due this week. Also on tap is the first round of France’s snap parliamentary election on June 30. France’s benchmark CAC 40 .FCHI ended 0.7% lower.

Among other stocks, Alfen clocked its worst day ever, plunging 46.7% after the Dutch energy storage specialist and EV infrastructure provider issued a profit warning.

Shares of Britain’s Deliveroo rose 1.2% following a Reuters report that U.S. meal delivery group Doordash had flagged an interest in a takeover of the company last month.

Reporting by Shashwat Chauhan and Shristi Achar A in Bengaluru and Jesus Calero in Gdansk; Additional reporting by Samuel Indyk; Editing by Sherry Jacob-Phillips, Sohini Goswami and Emelia Sithole-Matarise

Gold falls to two-week low as higher dollar, yields dent appeal

June 27 – Gold prices slipped 1% to their lowest level in more than two weeks on Wednesday, weighed by a stronger dollar and higher bond yields, while traders looked forward to US inflation data due later this week.

Spot gold was down 0.8%, at $2,301.16 per ounce by 2:03 p.m. ET (1803 GMT), its lowest since June 10.

US gold futures settled 0.8% lower, at USD 2,313.2.

“At this point, market may very well be responding to the firmer US dollar and we continue to price in the possibility that the US Federal Reserve is unlikely to move (interest rates) earlier in the summer,” said Bart Melek, head of commodity strategies at TD Securities.

The dollar rose 0.4% to a near two-month peak against its rivals, making gold more expensive for other currency holders, while benchmark U.S. 10-year yields hit a near two-week high.

The focus this week will be on the US Personal Consumption Expenditures Price Index, the Fed’s preferred inflation gauge, which could shed light on the central bank’s interest-rate path.

Also on the radar are U.S. first-quarter gross domestic product estimates and a crucial debate between President Joe Biden and Republican rival Donald Trump on Thursday.

Data out on Tuesday showed US consumer confidence eased in June amid worries about the economic outlook, but households remained upbeat about the labor market and expected inflation to moderate over the next year.

Fed Governor Michelle Bowman said on Tuesday that holding the policy rate steady “for some time” would probably be enough to bring inflation under control, but reiterated a willingness to raise borrowing costs if needed.

Higher interest rates increase the opportunity cost of holding non-yielding bullion.

Elsewhere, spot silver lost 0.1% to USD 28.88 per ounce, palladium slipped 2%, to USD 929.25, while platinum climbed 3.1%, to USD 1,011.88.

Reporting by Brijesh Patel and Daksh Grover in Bengaluru; Editing by Maju Samuel and Pooja Desai

Inflation scares and yen bears

June 27 (Reuters) – A look at the day ahead in Asian markets.

Inflation scares in Canada and Australia this week are a reminder that the global monetary easing cycle expected to broaden out and accelerate in the second half of the year is by no means certain.

This is a potential headache for investors in Asian and emerging markets as the mid-point of the year approaches, and could weigh on their investments for the next six months.

Figures on Wednesday showed that Australian inflation in May rose much faster than expected, back up to 4% and enough to flip the interest rate outlook – traders now reckon a rate hike this year is more likely than a cut.

The Aussie dollar’s rally quickly evaporated, however, much like the Canadian dollar’s rally following surprisingly strong Canadian inflation numbers earlier this week.

Both succumbed to the U.S. dollar, which hit a two-month high against a basket of major currencies on Wednesday. Will the inflation pulse in Canada and Australia show up in U.S. data too, and prevent the Fed from cutting rates?

This is the worry for Asia and emerging markets – a strong U.S. dollar tightens global financial conditions and steers capital towards U.S. assets at the expense of emerging markets.

So does rising Treasury yields, and on Wednesday U.S. bond yields broke out of their recent slumber and spiked higher. Wall Street closed modestly higher, but the dollar and yields may have more influence on Asian trading on Thursday.

Thursday’s Asia & Pacific economic calendar sees the release of Japanese retail sales, industrial profit numbers from China, an interest rate decision from the Philippines, and a speech from Reserve Bank of Australia deputy governor Andrew Hauser.

The Philippine central bank is widely expected to keep its key policy rate on hold at 6.50% for a sixth consecutive meeting, according to a Reuters poll, and deliver the first cut in the last three months of the year.

The Philippine peso is at its lowest level of the year against the U.S. dollar, down 6% year-to-date.

That’s only half of the 12% decline registered so far this year by the Japanese yen, which hit a 38-year low against the dollar on Wednesday.

It is now well below the 160.00 per dollar level that triggered large-scale yen-buying intervention from Japanese authorities nearly two months ago.

Not this time, at least not yet.

Unsurprisingly, short-dated dollar/yen implied volatility has spiked higher, but the magnitude of increase and levels reached hardly suggest traders are fearful of heavy-handed intervention.

Overnight implied vol on Wednesday rose the most since mid-May but only back to where it was on Tuesday. One-week implied vol rose the most in four weeks, but again, only back to where it was in mid-June.

Here are key developments that could provide more direction to markets on Thursday:

– Philippines rate decision

– Japan retail sales (May)

– China industrial profits (May)

Reporting by Jamie McGeever

Yields move sideways as 2s/10s inversion and issuance in focus

NEW YORK, June 26 – The yield curve inversion between the two-year and the 10-year notes deepened on Tuesday to more than 50 basis points for the first time this year, then partly reversed after strong demand at a two-year auction nudged that yield off its highs.

The 2s/10s spread is the most widely monitored section of the yield curve. Normally the yield curve is upward sloping, with shorter-term securities yielding less than longer maturities that entail more risk. The curve has been negative since mid 2022, a sign that the market expects a recession to materialize.

This has not happened yet, despite the Federal Reserve raising short term rates from March 2022 to July 2023 to rein in inflation. The Federal Reserve has signalled all year it is prepared to start easing once inflation comes down enough, and/or if other data, especially unemployment, starts pointing to significant slowing.

Right now the earliest the market sees a pivot is September and many are starting to wonder if the Fed will ease this year at all.

Tuesday’s economic data did not give straight signals. U.S. single-family home prices rose 0.2% in April after being unchanged in March. U.S. consumer confidence eased in June, with the index at 100.4 from a downwardly revised 101.3 in May, according to the Conference Board.

So, trade was relatively cautious ahead of Friday’s release of the May personal consumption expenditure inflation index, which may give more clues on the timing and extent of any cuts. The June payrolls report comes the following Friday.

“At the end of the day the Fed lowers rates because of the labor market and not because of inflation coming down,” said Lou Brien, market strategist at DRW Trading in Chicago. “If you look at the past 30-35 years the Fed reacts to the rise in the unemployment rate, and inflation, partly because it’s lulled us to sleep, has not been the primary factor.”

On Tuesday 2s/10s hit -51.6 basis points, its most inverted since December and was about -50 basis point late in the day, compared to Monday’s -49.1 bp.

Brien said that looking back, the Fed has tended to lower rates when the unemployment rate was one or two tenths of a percentage point above the cyclical low. It reached a record low 3.4% in April 2023 and gradually rose by six tenths to 4% in May with no cut.

Federal Reserve Governor Michelle Bowman on Tuesday said that holding the policy rate steady “for some time” will probably be enough to bring inflation under control, but also repeated her willingness to raise borrowing costs if needed.

Fed Governor Lisa Cook said it would be appropriate to cut interest rates “at some point” given significant progress on inflation and a gradual cooling of the labor market. She remained vague, however, about the timing of the easing.

“Maybe that’s why you are seeing more of an inversion of the curve, simply because there is getting to be a little bit of nerves on the labor market and what that might mean for the Fed.”

The yield on the two year note pared gains after the Treasury sold USD 69 billion at a high yield of 4.706%. That was about 5 bp below where the when-issued notes were trading at the close of bidding, indicating investors were eager to accept a yield below market rates.

The bid-to-cover ratio was 2.75, the highest since August 2023.

Two-year yields, which typically move in step with interest rate expectations, were 0.4 basis points higher than late Monday at 4.7381%. The yield on benchmark U.S. 10-year notes fell 0.8 basis points to 4.24%.

The Treasury has scheduled USD 183 billion in coupon debt to be auctioned this week, split between the two-year notes and five- and seven-year notes to be sold on Wednesday and Thursday.

Yields were moving lower in early morning trade but the release of Canada inflation data, which surprised on the upside, reversed that trend.

“Treasuries had a good bid this morning until the CPI (consumer price index) data in Canada came out and wiped away the Treasury rally,” said Tony Farren, managing director at Mischler Financial Group. Treasury prices and yields move in opposite directions.

On Tuesday, traders of futures contracts tied to the Fed’s policy rate were betting on two 25 basis point rate cuts this year, with a first cut in September seen as having a 61% probability.

Reporting by Davide Barbuscia, Editing by Franklin Paul and Nick Zieminski

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