US yields drop as market consolidates after rally

NEW YORK – US Treasury yields fell on Friday as the market consolidated following large yield increases over the past month as investors price in a less dovish Federal Reserve due to the US economy remaining stronger than previously expected.

Traders priced out the odds of an additional 50 basis point interest rate cut by the US central bank after data showed much stronger job gains than expected in September. Fed Chair Jerome Powell has also pushed back against the likelihood of further large cuts.

The Fed is expected to make steady 25 basis point reductions at its coming meetings. But traders are also focused on the outcome from the Nov. 5 US presidential election, geopolitical tensions in the Middle East and the strength of riskier asset markets.

“The market is decidedly in the mode of consolidation; there’s not any obvious potential triggers on the horizon,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.

However, it is “poised to respond to external influences. Those could come in the form of moves in the equity market, moves in credit, geopolitical concerns or even the progress towards the presidential election,” Lyngen said.

Benchmark 10-year yields were last down 2.1 basis points at 4.075%. They reached 4.12% on Oct. 10, which was the highest since July 31 and are up from 3.599% on Sept. 17, the lowest since June 2023.

The 10-year yields are holding just below the 200-day moving average at 4.17%.

Interest rate-sensitive two-year yields fell 3.2 basis points to 3.955%.

The yield curve between two-year and 10-year notes steepened 1 basis point to 11.8 basis points.

Atlanta Fed President Raphael Bostic
said Friday he will be patient on cutting rates to make sure inflation does not stall out above the US central bank’s 2% target.

Traders are now pricing in 44 basis points of cuts by year-end, implying they see a less-than-certain chance that the Fed will make a 25 basis point reduction at each of its next two meetings.

Data on Friday showed that US single-family homebuilding surged in September, though excess supply of new homes and prospective buyers holding out for lower mortgage rates pose a near-term challenge.

(Reporting by Karen Brettell; Editing by Jonathan Oatis)