Yields on U.S. government debt fell Monday morning after weak economic data from Europe and as traders await a trio of central bank policy decisions later this week.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.901%
slipped by 1.3 basis points to 4.833% from 4.846% on Friday. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.856%
retreated 1.8 basis points to 3.819% from 3.837% as of Friday afternoon. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.918%
fell 1.6 basis points to 3.89% from 3.906% late Friday.
What’s driving markets
Treasury yields were tracking declines for equivalent European paper
TMBMKDE-10Y,
after data released on Monday showed business activity in the eurozone weakened in July at the fastest rate in eight months.
The slowdown suggests recent interest-rate increases by the European Central Bank — alongside slowing demand from China — may be taking their toll.
The European Central Bank will deliver its next monetary policy decision on Thursday, a day after the Federal Reserve is expected to lift rates again as it battles inflation that remains above its 2% target.
Markets are pricing in a 99.8% probability that the Fed will raise interest rates by 25 basis points to a range of 5.25%-5.50% on Wednesday, according to the CME FedWatch Tool. The chances of another 25-basis-point hike by November is seen at 29%.
The U.S. central bank is expected to take its fed funds rate target back down to around 5% or lower next year.
In U.S. economic updates released on Monday, the S&P flash U.S. manufacturing PMI rose to a three-month high of 49.0 in July from 46.3 previously, while the services-related reading dropped to a five-month low of 52.4 from 54.4 in June.
What analysts are saying
“The U.S. economy still has a lot of momentum; we pushed back our recession call and now see the Fed on hold for longer, following the 25bp hike we expect this week [on Wednesday] and another in September or November,” said Ben McLannahan, Sue Ho, and Nick Gentle of Barclays.
“We expect the ECB [on Thursday] to hike by 25bp and to guide that it is close to the peak, though not necessarily there yet,” they wrote in a note. “We think the BoJ [Bank of Japan, on Friday] will stand pat, waiting for more evidence of sticky prices before launching revisions to its Yield Curve Control policy in October.”
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