US yields little changed as Fed’s Waller points to December rate cut

NEW YORK – US Treasury yields were little changed on Monday, after trading higher for most of the session, as Federal Reserve Governor Christopher Waller said he was inclined to cut the benchmark interest rate at the Dec. 17-18 policy meeting.

The yield on the benchmark US 10-year Treasury note, which was up earlier after manufacturing data releases in the morning, pared gains to 4.197%, slightly up on the day, after Waller’s comments. The US two-year yield, which typically moves in step with interest rate expectations, was up 1.2 basis points at 4.182%.

Yields on the long end of the curve slipped, with those on US 30-year bonds down marginally at 4.368%.

“Policy is still restrictive enough that an additional cut at our next meeting will not dramatically change the stance of monetary policy and allow ample scope to later slow the pace of rate cuts, if needed, to maintain progress toward our inflation target,” Waller said in comments at a central bank symposium organized by the American Institute for Economic Research.

Waller compared the Fed’s battle with inflation to a mixed martial arts fighter in that sport’s unique arena. “Let me assure you that submission is inevitable — inflation isn’t getting out of the octagon.”

Ellis Phifer, managing director for fixed income capital markets at Raymond James in Memphis, said Waller’s comments were seen as reassuring. “His comment showed a stronger than usual support for a rate cut, but we still have to see what the jobs data will show later in the week.”

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 economic outlook indicator, flattened slightly to 0.8 bp, compared with 1.4 bps late on Friday.

The overall flattening was earlier driven by the positive US data, which had initially reduced the odds of a 25-bp cut by the Fed later this month. That has since been offset by Waller’s comments.

Following Waller’s remarks, the markets raised the odds of a 25-bp easing this month to 75%, from 66% late on Friday, according to CME’s FedWatch. At the same time, rate futures reduced the chances of a Fed pause to 25% from 34% on Friday.

Earlier on Monday, Treasury yields rose modestly after data showed that the Institute for Supply Management’s manufacturing PMI increased to 48.4 last month from 46.5 in October, above the 47.5 economists polled by Reuters had forecast.

Analysts looking closely at the manufacturing data saw some signs of weakness not evident in headline numbers. Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin, said the headline improved, but details were disappointing, with 66% of manufacturing GDP contracting in November.

“The most important thing was the unexpected drop at the prices paid by manufacturers; that’s an interesting anecdote that could influence inflation indexes ahead,” said Vail Hartman, analyst on the US Rates Strategy team at BMO Capital Markets.

Meanwhile, this week’s slew of US employment data begins on Tuesday, with job openings in October, followed by the November ADP national employment report on Wednesday. The US nonfarm payrolls report will be out on Friday.

Although the focus is on the short-term FOMC decision, markets are also trying to estimate the longer-term interest rate level.

“We’ve already heard many Fed officials say their estimates of neutral policy this cycle has changed. The destination of policy over the next eighteen months and onward will matter a lot more for Treasuries at the long end of the curve than what happens this month,” said Will Compernolle, macro strategist at FHN Financial, in a research note.

(Reporting by Tatiana Bautzer; additional reporting by Chuck Mikolajczak; editing by Jonathan Oatis)