US yields slip after decent two-year note auction, ahead of inflation data

NEW YORK – US Treasury yields were slightly down on Monday, with benchmark 10-year yields hitting their lowest in more than two months amid good results on a USD 69 billion two-year note auction.

Markets are waiting for inflation data that could help gauge the timing of the Federal Reserve’s first interest rate cut this year.

Analysts saw a two-year auction as solid, with the note priced at a rate below the expected yield at the bid deadline, suggesting strong demand. Indirect bids, which include demand from foreign central banks, surged to a record 85.5% from the prior 65.0% and the 67.6% average, according to analysts from Action Economics.

On the economic data front, the Personal Consumption Expenditures index, the Federal Reserve’s preferred inflation gauge, is expected on Friday. Later this week, investors will also get the second estimate of fourth-quarter growth figures in the US

The yield on the benchmark US 10-year Treasury note fell 2.2 basis points (bps) to 4.398%, after earlier falling to 4.389%, the lowest since December 17. The yield on the 30-year bond slipped 1.3 bps to 4.656%.

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 positive 21.6 basis points, flattening from 22.9 basis points late on Friday.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, dipped 2.8 bps to 4.166%. Earlier, it hit the lowest since February 5 on Monday.

According to the CME’s Fed watch tool, the highest probabilities for the first rate cut of the year are between June and July. Markets estimate a higher possibility of a second cut between October and December, according to the tool.

Markets are attentive to any sign of a cooling economy after the S&P Global Survey showed on Friday a sharp decrease in US business activity in February.

Bob Brusca, chief economist at Fact and Opinion Economics, said markets are very optimistic about the interest rate trajectory.

“No one is considering that inflation has slowed, but (it) has been above target for a long time, so interest rate cuts should not be a done deal,” he said.

The 10-year TIPS breakeven rate was last at 2.412%, indicating the market sees inflation averaging about 2.4% a year for the next decade.

“The labor market continues to be strong, and I don’t see a lot of evidence of the ‘residual seasonality’ cited by Powell,” Brusca said, referring to seasonal patterns appearing in data that have already been seasonally adjusted.

(Reporting by Tatiana Bautzer in New York; Editing by Nia Williams and Nick Zieminski)