US yields little changed after auction as data eyed

NEW YORK – US Treasury yields were barely higher on Wednesday after an auction was well received by the market and investors turned toward data on economic growth and inflation later in the week to gauge the path of interest rate decisions by the Federal Reserve.

Investors have completely priced in a rate cut from the Fed of at least 25 basis points at its mid-September policy meeting, with expectations for a 50-bps cut at 36.5%, up from 11.3% a month ago, according to CME’s FedWatch Tool.

Yields have been declining as economic data has signaled a softening economy and inflation has resumed cooling, leading Fed Chair Jerome Powell to signal last week a shift in the central bank’s focus to supporting the labor market over combating inflation.

“A lot of people are just kind of waiting for the September meeting,” said Tom di Galoma, managing director and head of fixed income at Curvature Securities in Park City, Utah.

“The Fed is certainly ready to cut rates, I’m looking for 50 basis points in September. I’m probably an outlier, but the Fed probably wants to make the first move a substantial one, they want to probably get the economy going a little bit.”

Yields saw little reaction, only moving slightly higher, to an auction of five-year notes that was solid, with demand for the notes at 2.41 times the notes on sale. The yield was last up 0.7 bp to 3.664%.

The five-year auction follows a strong two-year note auction of USD 69 billion on Tuesday, with more supply coming on Thursday in the form of USD 44 billion in seven-year notes.

Data due on Thursday includes the second reading of economic growth in the preliminary report on second quarter gross domestic product. On Friday, the July personal consumption expenditures data will indicate whether inflation continues to cool.

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 2.9 basis points after narrowing to a negative 2.6 bps, its highest level since Aug. 8.

The narrower inversion suggested that the bond market is pricing in the Fed’s easing cycle.

The yield on the benchmark US 10-year Treasury note rose 1.1 basis points to 3.844%. The yield on the 30-year bond edged up 0.4 basis points to 4.132%.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, rose 0.6 basis points to 3.871%.

The break-even rate on five-year US Treasury Inflation-Protected Securities was last at 2.041% after closing at 2.042% on Aug. 27.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.042%, unchanged from the close on Aug. 27.

The 10-year TIPS breakeven rate was last at 2.153%, indicating the market sees inflation averaging about 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Rod Nickel and Jonathan Oatis)