US yields modestly higher as soft landing view rises

NEW YORK – US Treasury yields drifted higher on Monday as bond investors continued to price out near-term recession in the world’s largest economy amid data showing increased price pressures this month that could slow the pace of the Federal Reserve’s easing cycle.

Chicago Fed President Austan Goolsbee’s comments saying there are “lots of cuts” to come over the next 12 months – after last week’s jumbo interest rate cut of 50 basis points by the US central bank – weighed on Treasury yields as they pared their gains.

US yields on the long end of the curve – those from seven-year notes to 30-year bonds – earlier climbed to three-week highs. That further steepened the yield curve, a barometer of US economic prospects, with the gap between two and 10-year yields hitting positive 17.9 basis points (bps), the steepest since June 2022. It was last at positive 15.6 bps.

The yield curve tracked a bear steepening path, in which yields on longer-dated Treasuries are rising faster than those on shorter-term maturities, suggesting that investors are pricing in a pick-up in inflation expectations at some point in the future.

Data on Monday reinforced what the yield curve is indicating. A report showed a rise in a key component of S&P Global’s flash US Composite PMI Output Index, which tracks the manufacturing and services sectors. The survey’s measure of prices paid by businesses for inputs expanded to a one-year high of 59.1 from 57.8 last month. Its gauge of prices charged rose to 54.7 from 52.9 in August.

The output index, however, was little changed at 54.4 in September compared to a final reading of 54.6 in August. A reading above 50 indicates expansion in the private sector.

In afternoon trading, the benchmark 10-year yield rose 1.5 bps to 3.743% US10YT=RR after earlier hitting a three-week high of 3.794%.

“What kind of accelerated the sell-off (that pushed yields higher) a little bit is the thought that maybe we could be in a soft-landing situation. And I’m still not convinced it’s going to happen,” said Ellis Phifer, managing director for fixed income capital markets at Raymond James in Memphis.

Phifer believes a hard-landing scenario, or a deep recession, is in store for the US economy because the Fed waited too long.

“They should have gone (cut rates) in July to kind of get ahead of it,” Phifer said.

Phifer further cited Goolsbee’s comments on employment. Goolsbee noted that the Fed may have to increase the pace of easing because when employment falls, it is going to fall more quickly. Goolsbee is not a voter this year on the Federal Open Market Committee, but will rotate into voting status in 2025.

“Goolsbee’s concern about employment is hitting back at that soft-landing narrative,” Phifer said.

In other maturities, US 30-year yields increased 1.6 bps to 4.088%%, also hitting a three-week peak of 4.134%.

On the front end of the curve, US two-year yields were up 1 bp at 3.582%.

The US rate futures market has priced in a 54% chance of a smaller 25-bp cut at the November meeting with a 46% probability of the bigger 50-bp easing, according to LSEG calculations. For 2024, the futures market is implying cuts of around 78 bps.

The benchmark overnight rate is currently at a target range between 4.75%-5.00%.

Other Fed speakers on Monday led by Atlanta Fed President Raphael Bostic and Minneapolis Fed President Neel Kashkari justified the central bank’s big rate move last week.

And there are plenty more speaking this week who should help guide the market on what the Fed could be doing at its November meeting.

“People are saying that recession risks are not anywhere in the near term here, but more like possible (in the) long term,” said Stan Shipley, managing director and fixed income strategist at Evercore ISI in New York. “So people are taking some risk-on positions and moving away from Treasuries for now.”

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick Zieminski and Will Dunham)