10-year yields fall to four-month low on rate cut bets

Benchmark 10-year US Treasury yields fell to a four-month low on Tuesday on expectations that the Federal Reserve is getting closer to cutting interest rates.

Treasury yields have tumbled this month as softer jobs data and easing inflation boost the odds of a September rate cut. Traders are now pricing for two or possibly three rate reductions by December.

“The Fed has seen a lot more encouraging data, both on the labor market and inflation side, which has allowed the market to price in a somewhat more aggressive Fed easing cycle,” said Zachary Griffiths, senior investment grade strategist at CreditSights in Charlotte, North Carolina.

Fed Chair Jerome Powell said on Monday the three US inflation readings over the second quarter of this year “add somewhat to confidence” that the pace of price increases is returning to the Fed’s target in a sustainable fashion, remarks that suggest a turn to interest rate cuts may not be far off.

Fed Governor Adriana Kugler said on Tuesday that recent data suggests inflation will
continue to decline to the US central bank’s 2% target.

Tuesday’s drop in yields came as traders evaluate the possibility of more inflationary policies if Donald Trump wins the November US presidential election. Solid retail sales data for June also briefly pared the move.

US retail sales were unchanged in June, and the underlying trend was strong, which could boost economic growth estimates for the second quarter.

“You have to balance (rate cut expectations) with the higher yield/steeper curve concern with a Trump victory and retail sales maybe taking some wind out of the sails of the lower growth, more disinflation, better balance in the labor market trade,” Griffiths said.

Trump is seen as the candidate more likely to win the election after surviving an assassination attempt on Saturday. Online betting site PredictIt showed bets of an election win at 69 cents for Trump, up from Friday’s 60 cents, with a victory for Joe Biden at 24 cents.

Analysts have said that a Trump victory could lead to more inflation due to potential policies including tax cuts and more tariffs.

Benchmark 10-year yields were last down 6 basis points at 4.167%, the lowest since March 13.

Two-year yields fell half a basis point to 4.447% and earlier reached 4.409%, the lowest since March 8.

The inversion in the closely watched two-year, 10-year Treasury yield curve widened to minus 28 basis points after reaching minus 22 basis points on Monday, the smallest inversion since January.

The gap between two-year and 30-year yields US2US30=TWEB was at minus 7 basis points, after turning positive on Monday for the first time since January.

The Treasury will sell USD 13 billion in 20-year bonds on Wednesday and USD 19 billion in 10-year Treasury Inflation-Protected Securities (TIPS) on Thursday.

(Reporting by Karen Brettell; Editing by Will Dunham and Andrea Ricci)