US Treasury yields remain steady after auction, focus shifts to upcoming data

US Treasury yields: US Treasury yields remained largely unchanged on Wednesday following a successful auction, as investors turned their attention to upcoming economic data on growth and inflation later in the week. This data is expected to provide further insights into the Federal Reserve’s upcoming interest rate decisions.

Market participants have fully priced in a rate cut from the Federal Reserve, anticipating at least a 25 basis point reduction at the mid-September policy meeting. Expectations for a more significant 50 basis point cut have risen to 36.5 per cent, up from just 11.3 per cent a month ago, according to the CME's FedWatch Tool.

Economic cooldown lowers yields

Yields have been on a downward trend as recent economic data has pointed to a softening economy and cooling inflation. Last week, Fed Chair Jerome Powell indicated a potential shift in the central bank's focus towards supporting the labor market over aggressive inflation control.

"A lot of investors are in a wait-and-see mode ahead of the September meeting," said Tom di Galoma, managing director and head of fixed income at Curvature Securities in Park City, Utah. "I’m expecting a 50 basis point cut in September. While that might be a more aggressive stance, the Fed likely wants to make a significant initial move to stimulate the economy."

Despite the auction of five-year notes being solid, with demand at 2.41 times the amount on sale, yields only moved slightly higher. The yield on the five-year note ticked up 0.7 basis points to 3.664 per cent.

This auction followed a strong demand for two-year notes on Tuesday, where $69 billion was auctioned, with another $44 billion in seven-year notes set to be auctioned on Thursday.

Focus shifts to data

Investors are now focused on Thursday's economic data, which includes the second estimate of second-quarter gross domestic product (GDP), and Friday’s personal consumption expenditures data, which will provide further clarity on inflation trends.

The yield curve, a key indicator of economic expectations, remains inverted, with the gap between two-year and 10-year Treasury yields narrowing to a negative 2.9 basis points from 2.6 basis points earlier. This narrowing suggests that the bond market is factoring in the Fed's anticipated easing cycle.

The yield on the benchmark 10-year Treasury note rose by 1.1 basis points to 3.844 per cent, while the 30-year bond yield edged up by 0.4 basis points to 4.132 per cent. The two-year Treasury yield, closely tied to interest rate expectations, increased by 0.6 basis points to 3.871 per cent.

Meanwhile, the five-year US Treasury Inflation-Protected Securities (TIPS) breakeven rate, which reflects inflation expectations, held steady at 2.042 per cent, while the 10-year TIPS breakeven rate was last at 2.153 per cent, indicating market expectations of around 2.2 per cent inflation annually over the next decade.