Treasury yields turned mixed in Monday morning trading as investors weighed prospects for recession and the pace and scope of future Fed rate increases.
What yields are doing
- The 2-year Treasury note yield TMUBMUSD02Y, 2.895% fell to 2.892% compared with 2.897% at 3 p.m. Eastern on Friday. Yields and debt prices move opposite each other.
- The yield on the 10-year Treasury note TMUBMUSD10Y, 2.591% was 2.633% versus 2.642% on Friday afternoon.
- The 30-year Treasury bond TMUBMUSD30Y, 2.933% yielded 2.971%, compared with 2.976% late Friday.
What’s driving the market
Traders continue to assess the possibility that rising fears of a recession will force the Federal Reserve to back off of its aggressive rate hike campaign. As of Monday, fed funds futures implied a 70% likelihood that policymakers will raise their main policy rate target by just 50 basis points, to between 2.75% and 3%, in September. The 2-year yield continued to trade above the 10-year rate, leaving the spread between the two at minus 26 basis points — a reliable recession warning signal.
The Fed ended its two-day policy meeting last Wednesday with another 75-basis-point rate hike in an effort to curb soaring inflation. Fed Chair Jerome Powell said that another 75 basis-point move could be appropriate in September but that the Fed would take a data-dependent, meeting-by-meeting approach to decisions.
Powell also warned that the economy would need to see a period of below-trend growth to rein in red-hot inflation and that the path to a so-called soft landing for the economy continued to be narrow.
Federal Reserve Bank of Minneapolis President Neel Kashkari said Sunday that the central bank is still committed to its goal of 2% inflation. However, “we are a long way away” from that goal, he said in an interview on CBS News’ “Face the Nation.”
Meanwhile, investors will be paying close attention to economic data, culminating in Friday’s July jobs report. Nonfarm payrolls and other employment data will be parsed for signs a still strong labor market is beginning to show cracks.
On Monday, the Institute for Supply Management’s closely watched manufacturing production index dipped in July, while the final July reading of the S&P manufacturing purchasing managers index came in at 52.2 vs an initial 52.3 reading.
What analysts say
“U.S. rates are holding a narrow range as August gets underway. Focus on the Fed’s commitment to continue increasing rates will define this week and Kashkari’s comments have set the tone early,” said BMO Capital Markets Ian Lyngen and Ben Jeffery.