10-, 30-year Treasury yields end at one-week lows after batch of weak PMI data

Long-dated Treasury yields finished at their lowest levels in more than a week on Wednesday, as weakening economic activity from the U.S., eurozone and U.K. dimmed the global outlook.

What happened

  • The yield on the 2-year Treasury
    fell 8.5 basis points to 4.950% from 5.035% on Tuesday. Tuesday’s level was the highest since March 8, based on 3 p.m. data from Dow Jones Market Data.

  • The yield on the 10-year Treasury
    dropped 13 basis points to 4.197% from 4.327% Tuesday afternoon.

  • The yield on the 30-year Treasury
    fell 12.7 basis points to 4.283% from 4.410% late Tuesday.

  • Wednesday’s levels are the lowest for the 10- and 30-year yields since Aug. 14. The 10- and 30-year rates are down by 14.2 basis points and 17.2 basis points, respectively, over the last two trading days.

What drove markets

Yields on U.S. government debt began falling early Wednesday after a batch of poor economic data out of Europe.

The eurozone composite purchasing managers index, which combines reports from the services and manufacturing sectors, showed activity fell in August to its lowest in 33 months. A similar survey for the U.K. also surprised by showing activity at a 31-month low.

German 10-year bund yields
the continent’s benchmark, fell 12.4 basis points to 2.521%, while equivalent duration U.K. gilt yields
slid 18.3 basis points to 4.471% as traders pared back expectations for further interest-rate increases by the European Central Bank and Bank of England.

U.S. Treasury yields fell in sympathy and remained lower after S&P Global’s flash U.S. services-sector index fell to a six-month low of 51 in August and the manufacturing-sector index dropped to a two-month low of 47.

Investors are looking ahead to Friday, when Fed Chair Jerome Powell gives a speech at the central bank’s Jackson Hole symposium.

Read: Why this abstract concept could rattle stocks when Powell speaks at Jackson Hole

Until then, markets are pricing in an 88.5% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool. The chance of a 25 basis point rate hike to a range of 5.5%-5.75% at the subsequent meeting in November is seen at 35.5%.

Treasury’s $16 billion auction of 20-year bonds produced mixed results.

What analysts are saying

“Investors are increasingly convinced rates can — and will — remain elevated for some time, reflecting both solid growth expectations and rising odds of a soft landing. We would agree the rate risk is to the upside, at least in the near term as growth remains modest in a range of 2-3% through year-end and the Fed continues to raise rates closer to 6% in an attempt to slow inflation,” said economists Lindsey Piegza and Lauren Henderson at Stifel, Nicolaus & Co.

“That being said, there are already cracks in the economy,” they wrote in a note. “With manufacturing contracting, the housing market slowing, and the consumer increasingly reliant on artificial supports to supplement spending, growth is likely to — eventually — slow. An outright recession may be avoided, but at the very least, 500bps+ in Fed rate hikes will expectedly result in a sluggish, lackluster topline expansion with GDP falling well below potential in ‘24-‘25.”

10-, 30-year Treasury yields end at one-week lows after batch of weak PMI data

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