US yields dip as Fed’s Powell’s comments keep September easing bets intact

NEW YORK – US Treasury yields slipped on Wednesday, as Federal Reserve Chair Jerome Powell’s comments overall leaned dovish, affirming expectations that the central bank will start its easing cycle later this year.

A solid US 10-year note auction also marginally added bids to Treasuries that weighed on yields as well.

Powell spoke for a second day in Congress, this time before the House of Representatives Financial Services Committee for his semi-annual monetary policy testimony. Powell said he was not yet ready to declare victory over inflation, but felt that the economy is on a stable path to steady prices and continued low unemployment.

“What we’re seeing is that the market is incrementally believing in September as the first rate cut,” said Rob Haworth, senior investment strategy director at US Bank Wealth Management in Seattle. “We have seen the odds increase for the September cut. The question is: is the Fed ready to set up the July meeting to confirm to the market that they’re ready to go in September?”

Powell’s comments on Tuesday before the US Senate Banking Committee were perceived as somewhat dovish, prompting a selloff in Treasuries that pushed their yields higher.

Powell said on Tuesday the Fed will not be cutting rates until it gains “greater confidence” that inflation is headed toward the 2% target. For now though, inflation remains above the 2% goal but the most recent monthly readings have shown further, modest progress, Powell noted.

In afternoon trading, the US 10-year yield edged lower to 4.284%, down 1.6 basis points (bps).

The auction of USD 39 billion in US 10-year notes was stronger than expected. The high yield was 4.276%, lower than the expected rate at the bid deadline, suggesting that investors were willing to take a lower yield to buy the note.

The bid-to-cover ratio, a measure of demand, was 2.58, a little higher than the 2.52 average, but slightly lower than last month’s 2.67 cover.

In other maturities, US 30-year yields fell 2.3 bps to 4.472%.

The two-year yield, which typically reflects interest rate expectations, was flat at 4.63%.

The yield curve, measuring the difference between US two- and 10-year yields, flattened, increased its inversion, to minus 35 bps.

Wednesday’s curve is what is described as a “bull flattener” in which longer-dated rates are falling more sharply than shorter-term ones, which reflects lower inflation expectations. Analysts said a bull flattener typically precedes a cut in interest rates.

The curve, however, has been on a steepening trend since late June. Investors believe that the front end of the curve has peaked and the Fed is not going to need to raise interest rates again. That is holding the front end of the curve relatively steady.

US rate futures markets are pricing in 50 basis points (bps) of rate cuts by the end of December, with the first probably in September, according to LSEG calculations.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Sharon Singleton and Will Dunham)