Yields fall after manufacturing data, Fed comments

NEW YORK – US Treasury yields declined on Tuesday, easing after a recent run to the upside that sent the benchmark 10-year note to a 2-1/2 month high, following a soft reading of manufacturing activity in New York State.

The New York Fed’s monthly gauge of factory activity in the state fell to a negative 11.9 in October from the prior 11.5 in September. Readings above zero indicate expanding activity.

Economists polled by Reuters had expected another month of expanding activity with a median forecast of 3.85.

“Yield to the upside kind of ran its course at this point and you just needed a small catalyst to kind of create a soft cap at this point, that’s all it is,” said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

“You’d probably need to have some type of material catalyst in order for it to keep running higher and since we really haven’t had that at this point now, it’s probably just going to be range-bound until we can get evidence as to what might factor into what the Fed will do going forward.”

The yield on the benchmark US 10-year Treasury note fell 3.9 basis points to 4.034%.

The 10-year yield has risen for four straight weeks, reaching 4.12% last week, its highest since July 31 in the wake of a strong payrolls report that diminished expectations for another outsized rate cut of 50 basis points (bps) from The Federal Reserve at its November policy meeting.

The yield on the 30-year bond declined 5.8 basis points to 4.324%.

Markets are now pricing in a 94.1% chance for a cut of 25 bps at the Fed’s next meeting, with only a 5.9% chance the central bank will hold rates steady, according to CME’s Fedwatch Tool. Expectations for a 50 bps cut were at 27% a month ago.

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 7.8 basis points.

Comments from Fed officials, including Chair Jerome Powell, have signaled a shift in focus from combating inflation to labor market stability while also being deliberate in the path of future rate cuts. Investors will eye data on the health of the consumer on Thursday with retail sales numbers for September.

Federal Reserve Bank of San Francisco President Mary Daly said the central bank remains on track for more rate cuts this year as long as data meets expectations, while noting that even with last month’s rate cut, monetary policy is still working to bring inflation pressure down.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, edged up 1.1 basis points to 3.982%.

Federal Reserve Bank of Atlanta President Raphael Bostic is scheduled to speak later on Tuesday.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.239% after closing at 2.283% on October 11.

The 10-year TIPS breakeven rate was last at 2.291%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

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