Yields slide after Treasury announcement with Fed decision ahead

NEW YORK, Jan 29 – US Treasury yields slid on Monday at the start of a busy week that includes potentially market-moving jobs data and a Federal Reserve decision after the Treasury Department said it would need to borrow less than its previous estimates.

The US Treasury said late in the session that it expects to borrow USD 760 billion in the first quarter, USD 55 billion lower than the October estimate primarily due to forecasts for increased net fiscal flows and higher cash balance.

The Treasury also announced it expects to borrow USD 202 billion in the second quarter, as it projects a cash balance of USD 750 billion at the end of June.

Concerns over a wave of supply due to the increasing federal deficit pushed yields near two-decade highs in October, though signs that inflation is cooling and the US economy may be on pace for a soft landing have helped bring yields down since.

In late afternoon trading, the benchmark 10-year yield was down 9.4 basis points to 4.066%. It had been down 7.1 basis points prior to the Treasury announcement. The yield on the 30-year Treasury bond was down 8 basis points to 4.310%.

Investors are also bracing for the Federal Open Market Committee (FOMC) rate decision and statement on Wednesday and US non-farm payrolls data on Friday.

There are no fireworks expected in terms of the rate decision, with the Fed widely seen as holding interest rates steady, but some investors believe the US central bank could drop its hiking bias.

Analysts said overnight volume in US Treasuries was about 70% of the average.

“We’re stuck in a range right now of roughly 3.90% at the bottom and about 4.20% at the top here in the 10-year and this is much ado about nothing,” said Stan Shipley, managing director and fixed income strategist, at Evercore ISI in New York.

“It’s not likely that the 10-year is going to move much in front of the FOMC on Wednesday and payrolls on Friday given all the uncertainty.”

Federal funds futures on Monday priced in five rate cuts of 25 bps each for 2024, according to LSEG’s rate probability app. The market is also fully pricing in the first rate cut to occur at the May meeting, with a 91% probability.

At the March meeting, futures see a less than 50% chance of a Fed rate cut, down from as much as 80% three weeks ago.

On payrolls, Wall Street economists expect the US economy to have created 180,000 jobs in January, according to a Reuters poll, down from 216,000 in December. The unemployment rate is expected to have inched up to 3.8%.

In other corners of the bond market, the closely watched yield gap between two- and 10-year US Treasury notes flattened, widening its inversion to minus 21.60 basis points US2US10=TWEB.

Analysts described the yield curve move as a “bull flattener,” in which the decline in long-term rates is steeper than those in short-dated ones. This is a scenario that normally precedes a cut in interest rates by the Federal Reserve.

The bull flattening on Monday suggests a flight-to-safety trade, analysts said, and comes after the killing of three US troops and wounding of dozens more on Sunday in Jordan by Iran-backed militants.

In other maturities, the US two-year yield, which reflects interest rate expectations, was down 5.7 basis points at 4.308%. It had been down 4.3 basis points prior to the Treasury announcement.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by David Randall; Editing by Andrea Ricci, Cynthia Osterman, and Marguerita Choy)