Bond Report: Treasury yields rise as Federal Reserve officials push back against rate-cut bets

U.S. Treasury yields rose on Thursday after some senior Federal Reserve officials said they didn’t see the need for further interest rate cuts, underscoring the split within its rate-setting committee on the need for further policy easing.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, +1.44%  rose 3.6 basis points to 1.613%, while the 2-year note rate TMUBMUSD02Y, +2.33%  picked up 3.7 basis points to 1.606%. The 30-year bond yield TMUBMUSD30Y, +1.55%   was up 5.4 basis points to 2.105%. Debt prices move in the opposite direction of yields.

The 2-year/10-year yield spread inverted on Thursday, trading at less than negative 1 basis point. An inverted curve can serve as a prelude to a recession.

What’s driving Treasurys?

Philadelphia Fed President Patrick Harker and Kansas City Fed President Esther George both said they did not support further interest rate cuts. On other hand, Dallas Fed President Robert Kaplan said slowing international growth and a weakening manufacturing sector might necessitate action from the U.S. central bank but that he would prefer to keep rates on hold in September.

After remarks from Harker and George, expectations for the Fed to keep rates unchanged in September rose to around 7%, from zero a day ago.

Currently George is a voting member of the Federal Reserve’s rate setting committee but Harker and Kaplan are not.

On Wednesday investors also saw the minutes of last month’s Federal Reserve meeting which showed officials saw the need for a meeting by meeting approach, and that they did not want to commit to a “preset course.”

Fed Chairman Jerome Powell is set to speak on Friday at the Jackson Hole symposium in Wyoming. Analysts are expecting Powell to confirm a widely anticipated September rate cut.

Comments from the senior Fed officials on Thursday helped offset soft economic data to push government bond yields higher.

In economic data, the IHS Markit manufacturing purchasing managers index fell to 49.9 in August, a 10 year low. Analysts remain concerned that a factory slowdown will spill over into the broader U.S. economy. Any number above 50 indicates an increase in industrial activity, while any number below 50 reflects a withering of economic activity.

What did market participants’ say?

“The choppy price action in Treasuries on Thursday was principally a function of dueling headlines surrounding Committee members’ (both voting and non) willingness to engage in an easier monetary policy stance,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, in a Thursday note.

”In terms of Fedspeak, it felt like a moment when the hawks had their say as a prelude to senior FOMC leadership such as Powell, Clarida, and Williams,” said Lyngen.

What else is on investors’ radar?

The eurozone economy may have started to steady in recent weeks after the flash composite IHS Markit purchasing managers index for the eurozone rose to 51.8 in August, from a previous reading of 51.5.

The eurozone service sector PMI hit a two month high of 53.4, up from 53.2, and the manufacturing sector PMI recovered to 47.0 from 46.3, continuing to contract but at a slower pace.

With activity still subdued overall, the survey compiler IHS Markit said the composite index points to economic growth of 0.1-0.2%.

See: European economy sees slight recovery from trade tensions in August, PMI data shows

The German 10-year government bond yield TMBMKDE-10Y, +4.37%   rose 3.3 basis points to negative 0.645%.

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