US yields advance as markets consolidate ahead of Fed speakers, economic data

NEW YORK – US Treasury yields rose on Monday after falling sharply last week, as investors consolidated positions ahead of a slew of economic data and Federal Reserve speakers who could further clarify the timing of the first interest rate cut this year.

US two-year to 30-year yields gained after declining for four straight days.

Data showing the New York Fed’s Empire State Current Business Conditions index slipped less than expected to minus 6.0, from minus 15.6 the previous month helped extend the rise in yields. But analysts said US Treasury yields were primed for a snapback after declines the previous week.

In afternoon trading, the benchmark 10-year yield rose 6.2 basis points to 4.275%. Last Friday, it posted its biggest drop for the year after weaker-than-expected economic data, led by lower import prices.

US 30-year yields climbed 5.3 bps to 4.403%.

On the front end of the curve, the US two-year yield was up 8.3 bps at 4.767%.

“Even with the rise in US yields, they are going to be capped overall. But this week, we’re going to get housing, retail sales, and jobless claims,” said Stan Shipley, managing director and fixed income strategist at Evercore ISI.

“Generally, I would think that retail sales and housing would be better than expected, just a rebound from March and April. The market is going to also watch jobless claims closely because they jumped last week. So the question is: Is the labor market really slowing?”

The Fed’s new projections on interest rates released last week showed that the first interest rate cut is likely to happen in December, with officials projecting just a single quarter-point reduction for the year.

Philadelphia Fed President Patrick Harker echoed the Fed’s rate forecasts on Monday, saying that if his economic projections play out, one rate cut would be appropriate in 2024.

The US yield curve, meanwhile, deepened its inversion on Monday. The spread between US two- and 10-year yields, widely seen as a precursor to recession, hit minus 49.5 bps, the most inverted since mid-March. The curve was last at minus 49.3 bps compared with minus 48.6 bps.

The current curve is effectively a “bear flattener,” a scenario in which short-term interest rates are rising faster than longer-dated ones. This likely suggests a delay in interest rate cuts because US economic numbers have been strong, analysts said.

Analysts also said Treasury supply was likely a factor for the decline in prices and the consequent rise in yields, with USD 13 billion in US 20-year bonds and USD 21 billion in five-year Treasury Inflation Protected Securities to be auctioned on Tuesday and Thursday respectively.

Ahead of an auction, market participants typically sell Treasuries to push their yields higher, buying them back later at a lower price.

Fed funds futures have priced in a more than 60% chance of easing in September, according to LSEG calculations, factoring in between one to two rate cuts for the year.

“After one of the biggest and most aggressive rate campaigns globally, markets appear skewed toward lower rates,” wrote Gregory Faranello, head of US rates at AmeriVet Securities, in a research note. “It won’t be a straight line, but we’ve done some unbelievable work at higher rate levels.”

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick Zieminski and Alison Williams)