US yields fall after Fed keeps rates steady, signals potential cut

NEW YORK – US Treasury yields were mostly lower on Wednesday, with the benchmark 10-year note yield on track for its biggest drop in two weeks, after the Federal Reserve kept interest rates at their current levels, as was widely expected.

Yields initially moved higher after the policy statement in which the central bank held rates
steady, but signaled the door was open to reduce borrowing costs as soon as its next meeting in September as inflation draws closer to its 2% target rate.

But yields turned lower as Chair Jerome Powell spoke after the announcement and noted that central bank officials had a “real discussion” about cutting rates at the July meeting but a strong majority believed it was not the appropriate time.

“As expected, the Federal Open Market Committee decided to keep its key interest rate, the federal funds rate, unchanged,” said Travis Keshemberg, Senior Portfolio Manager for the systematic edge multi-asset team at Allspring Global Investments in San Francisco.

“We believe the Federal Reserve will cut rates for the first time this cycle at its September meeting as long as incoming data continue to align with our expectations.”

Yields were lower before the Fed statement after economic data indicated a slowing in the labor market and wage growth indicating the central bank has some cushion to cut rates this year.

The ADP National Employment Report showed private payrolls rose by 122,000 jobs this month, short of the 150,000 of economists polled by Reuters, after advancing by an upwardly revised 155,000 in June.

In addition, the employment cost index (ECI), the broadest measure of labor costs, increased 0.9% last quarter, below the 1.0% estimate, after rising by an unrevised 1.2% in the first quarter, another sign inflation is cooling.

Recent inflation data such as the consumer price index (CPI) has fueled expectations recently the Fed will be in a position to cut rates this year.

The yield on the benchmark US 10-year Treasury note fell 6.3 basis points, its fifth straight session of declines, to 4.078% after dropping to 4.074%, its lowest level since March 11.

The reports were on the heels of job openings data on Tuesday that suggested a gradual slowing in the labor market and ahead of the key government payrolls report on Friday.

The yield on the 30-year bond was also lower for a fifth straight session and was last down 4.9 basis points to 4.35% after hitting a six-week low of 4.342%.

Treasury said earlier on Wednesday that it does not expect to increase auction sizes for US notes and bonds over the next several quarters, as it announced a total refunding of USD 125 billion for the August to October quarter.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 21.4 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, dropped 6.9 basis points to 4.29% after falling to 4.284%, its lowest since February 2.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.145% after closing at 2.133% on July 30.

The 10-year TIPS breakeven rate was last at 2.235%, indicating the market sees inflation averaging about 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak, Editing by Nick Zieminski and Chizu Nomiyama)