U.S. Treasury yields continued their downward trajectory Thursday, with the benchmark 10-year Treasury note briefly dipping to 3.967%, its lowest level since . The yield ultimately settled at 3.976%, a decline of more than 7 basis points, as investors reacted to a weaker-than-expected economic survey and growing concerns about the health of the U.S. Economy.
The move reflects a broader trend of declining yields observed in recent weeks. The 2-year Treasury note also saw a decrease, falling 8 basis points to 3.424%, reaching its lowest point since . Even the 30-year bond yield participated in the rally, shedding over 5 basis points to land at 4.587%. One basis point is equivalent to 0.01%, and the inverse relationship between bond yields and prices means this decline signals increased demand for U.S. Debt.
The catalyst for Thursday’s move was a disappointing report from the Philadelphia Federal Reserve. The region’s manufacturing survey slumped 36 points to -12.8, significantly underperforming economists’ expectations of a 9.5 reading. While new orders showed some resilience, shipments tumbled, and employment figures edged lower. This data fueled anxieties about a potential slowdown in economic activity.
However, the decline in yields wasn’t solely attributable to the Philadelphia Fed survey. A confluence of factors is contributing to the current environment. Recent bankruptcies have raised concerns about lending standards and the potential for increased defaults, particularly within the banking sector. This, coupled with ongoing trade tensions and the protracted U.S. Government shutdown – now entering its third week – is prompting investors to reduce risk exposure and seek the relative safety of U.S. Treasuries.
The market’s reaction also occurred against a backdrop of uncertainty surrounding Federal Reserve policy. Several Fed governors, including Christopher Waller, Michael Barr, Stephen Miran, and Michelle Bowman, addressed audiences on Thursday, offering conflicting perspectives on the timing and pace of potential interest rate cuts. Miran and Waller, in particular, presented divergent views, reflecting the internal debate within the central bank regarding the appropriate response to a weakening labor market and heightened geopolitical risks.
The 10-year Treasury yield had previously fallen below the 4% threshold on , following the release of inflation data and a rise in jobless claims. At that time, the yield reached 4.019%, down from 4.04% earlier in the day. The August Consumer Price Index (CPI) rose by 0.4% on a seasonally adjusted basis, double the previous month’s increase, bringing the annual inflation rate to 2.9%. Simultaneously, weekly jobless claims jumped to 263,000, the highest level since .
Ian Lyngen, head of U.S. Rates strategy at BMO Capital Markets Fixed Income Strategy, commented at the time that the data “reinforced the limited inflationary fallout from the trade war (thus far) and the mounting concern that the labor market is quickly weakening.” He suggested the data supported a 25-basis-point rate cut at the September 16-17 meeting, with the possibility of a larger 50-basis-point reduction, although he remained inclined towards the smaller cut.
The market was pricing in a nearly 95% probability of a quarter-point cut, with a 5% chance of a half-point move, according to the CME Group’s FedWatch tool. This demonstrates the sensitivity of the market to economic data and the anticipation of a shift in monetary policy.
The recent decline in Treasury yields also comes after the 10-year yield briefly touched 4% on , as investors sought clues regarding the Federal Reserve’s next steps. The initial move lower followed the release of the weaker Philadelphia Federal Reserve survey. This pattern highlights the interconnectedness of economic data, investor sentiment, and Treasury yields.
The ongoing government shutdown adds another layer of complexity to the situation. Investors are closely monitoring speeches by Federal Reserve officials in the hope of gaining insight into the future path of monetary policy, particularly as the shutdown continues to disrupt economic activity and create uncertainty. The combination of these factors suggests that the demand for U.S. Treasuries is likely to remain strong in the near term, potentially pushing yields even lower.
The current environment presents a challenge for the Federal Reserve, which is tasked with balancing the need to control inflation with the risk of triggering a recession. The conflicting signals from economic data and the internal debate within the central bank underscore the difficulty of navigating this complex economic landscape. The market will continue to scrutinize economic releases and Fed communications for clues about the future direction of interest rates and the overall health of the U.S. Economy.
