Shorter-dated US yields lower after data as curve steepens

NEW YORK – Yields on shorter-dated US Treasuries fell on Wednesday but rose on longer durations as investors digested a flurry of economic data to gauge the health of the economy.

A closely watched part of the US Treasury yield curve measuring the gap between two- and 10-year Treasury notes, an indicator of economic expectations, was at a negative 13.4 basis points after steepening to a negative 13.0, its least inverted since Oct. 23.

An inversion of this part of the curve is widely viewed as a reliable signal that a recession is likely to follow in one to two years. It was last un-inverted in early July 2022.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, fell 3.5 basis points to 4.41%.

The benchmark US 10-year Treasury note yield rose 3.9 basis points to 4.278%.

The Commerce Department said the US trade deficit in goods narrowed in June as exports rebounded, but trade likely remained a drag on economic growth in the second quarter. The gross domestic product report for that period is due out on Thursday.

Yields briefly pared declines after S&P Global said its flash US Composite PMI Output Index, which tracks the manufacturing and services sectors, edged up to 55.0 in July, signaling expansion to the highest level since April 2022. However, there were signs companies were having difficulty maintaining higher prices.

Investors awaited June personal consumption expenditures (PCE) data on Friday for further clues on the inflation outlook and the path of interest rates from the Federal Reserve.

Markets have grown more confident the Fed will cut rates this year as recent inflation data such as the consumer price index (CPI) have indicated prices are cooling again.

“Things are going to oscillate around but we need more data to figure out what trend we’re actually going to be going in,” said JoAnne Bianco, BondBloxx partner and client portfolio manager in Chicago.

“You had headline and core CPI come in lower than expected, those are inputs into PCE and core PCE so I’m anticipating more of the same.”

The yield on the 30-year bond rose 7.1 basis points, on track for its biggest daily gain since July 1, to 4.541%.

The Fed is scheduled to hold its next policy meeting at the end of July. Markets see only a slight chance for a rate cut of at least 25 basis points (bps) at that meeting, but are completely pricing in a cut in September, according to CME’s FedWatch Tool.

Yields rose after a mediocre Treasury auction of USD 70 billion in five-year notes US5YT=RR ended with a high yield of 4.121% and demand at 2.4 times the notes on sale.

Another USD 44 billion in seven-year notes is scheduled for Thursday in the week’s final auction.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.184% after closing at 2.179% on July 23.

The 10-year TIPS breakeven rate was last at 2.28%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Toby Chopra and Richard Chang)