US Treasury yields rise as investors assess recession views

Yield rise: US Treasury yields edged up on Tuesday as investors balanced the prospects of the US economy avoiding a recession against upcoming results of a two-year note auction, expected to show investor demand.

That supported Wall Street expectations and pared the spread between yields on two-year and 10-year Treasury notes—key gauges of growth expectations—to its narrowest in three weeks at minus 8.7 basis points, relative to minus 12.4 basis points on Monday. All of this suggests the bond market is beginning to price in an expected easing cycle by the Federal Reserve, which is likely to kick off next month.

Economic data drove market fluctuations this Tuesday: 10-year Treasury yields briefly fell after reports showed US single-family home prices fell in June, pushing the annual increase to its smallest in nearly a year.

In the most recent available readings, the 10-year note yield increased 2.4 basis points to 3.844 per cent, while the 30-year bond yield was higher at 4.139 per cent by 3.2 basis points. The two-year Treasury yield held at 3.928 per cent.

Another report indicated that US consumer confidence rose in August but also noted that Americans were becoming more wary of the labour market.

The Treasury is due to auction off $40 billion of two-year notes at 1 p.m. ET, and the results will provide a clear sign of whether investors put much faith into any of the data.

MARKET RUMBLES Investors are anxious betwixt how aggressively the Federal Reserve might cut interest rates to forestall a recession. "The question is how slow is the economy slowing. That's going to determine how fast the Fed is going to ease," said Stan Shipley, fixed income strategist at Evercore ISI in New York.

The increasing likelihood of a 50-basis-point cut over the next two weeks has raised the pressure, and hasn't been lost on Treasury markets nor other sovereign yields, where expectations are for faster central bank easing to lower the risks of recession.

Rates declined last week following the Fed's indication at its Jackson Hole symposium that it is ready to cut rates. Fed Chairman Jerome Powell hinted at the likelihood of a rate cut while for the first time adding that cooling labor markets further is important, while he was confident that inflation is nearing the 2 per cent target.

As of this writing, traders were pricing in either a 25-basis point or a 50-basis point rate cut in September. The CME Group's FedWatch tool showed a 71 per cent probability of a 25-bps cut and a 29 per cent probability of a 50-bps cut.