Treasury yields drop as job openings decline ahead of Friday’s employment report

Treasury yields drop: Treasury yields fell, with two-year yields reaching a 15-month low on Wednesday following a report showing a drop in US job openings to a 3.5-year low in July. The yield curve between two-year and ten-year notes also turned positive for the first time since August 5.

The upcoming August jobs report, scheduled for release on Friday, could influence the Federal Reserve's decision at its September 17-18 meeting regarding a potential rate cut of 25 or 50 basis points.

Ian Lyngen, head of US rates strategy at BMO Capital Markets, stressed, “The major event this week is Friday's payrolls report. It will largely determine what to expect from the Fed. Employment data is now the main focus, surpassing inflation concerns.”

Rate cut bets rise

Following Wednesday's job openings data, traders have increased their expectations for a larger 50 basis point rate cut. Currently, there is a 43 per cent chance of a 50 basis point reduction, up from 39 per cent before the data, and a 57 per cent chance of a 25 basis point cut, according to CME Group's FedWatch Tool.

Atlanta Fed President Raphael Bostic warned on Wednesday that keeping interest rates too high for too long could negatively impact employment.

However, Subadra Rajappa, head of US rates strategy at Societe Generale, suggested that the market might be overreacting to the data, as the economy is still showing solid growth. "There is no substantial evidence suggesting an imminent recession," Rajappa noted. "The market's aggressive rate cut pricing may be premature."

Traders are anticipating 237 basis points of rate cuts by the end of 2025.

Two-year note yields were down 10.5 basis points at 3.783 per cent, after hitting 3.772 per cent, the lowest since May 2023. Benchmark ten-year note yields fell 6.6 basis points to 3.778 per cent, reaching 3.767 per cent, the lowest since August 20.

Yield curve reversal

The yield curve between two- and ten-year Treasuries briefly turned positive before dropping back to minus 0.70 basis points. This inversion, where shorter-dated yields are higher than longer-dated ones, has persisted since July 2022 and is seen as a potential recession signal.

Despite the inversion, many analysts believe the US economy will weaken but avoid a recession.

Friday's employment report is forecasted to show an addition of 160,000 jobs in August, with the unemployment rate expected to decline to 4.2 per cent from 4.3 per cent in July. The Fed's Beige Book noted a slowdown in economic activity and reduced hiring from mid-July through late August.

(With Reuters Inputs)