US Markets

U.S. yield curve flattens as Fed's Powell cools rate-cut bets

Credit: REUTERS/Dado Ruvic

The margin between U.S. short- and long-dated yields collapsed to its lowest level in over four months on Wednesday, as Federal Reserve Chairman Jerome Powell tempered bets on more rate cuts after the central bank made the first cut since 2008.

By Richard Leong

NEW YORK, July 31 (Reuters) - The margin between U.S. short- and long-dated yields collapsed to its lowest level in over four months on Wednesday, as Federal Reserve Chairman Jerome Powell tempered bets on more rate cuts after the central bank made the first cut since 2008.

Shorter-dated yields rose as traders scaled back positions on future rate cuts, while longer-dated yields fell on the Fed's muted inflation outlook and the halting of its balance sheet normalization two months early.

"The short-end was not doing better because Powell said it's not the start of a cycle of rate cuts," said Mary Ann Hurley, vice president of fixed income at D.A. Davidson.

Powell, speaking in a news conference after a two-day policy meeting, characterized the rate cut as "a mid-cycle adjustment to policy," raising doubts steep rate cuts are on the way. Earlier, he and other policy-makers decided to lower rates by a quarter of a percentage point.

Traders still see one more rate decrease this year, perhaps coming as early as September. Powell's remarks, however, slashed expectations the Fed is prepared to lower more than twice into next year, according to CME Group's FedWatch tool that assesses interest rates futures.

In late U.S. trading, benchmark 10-year Treasury yields US10YT=RR were down 5.50 basis points at 2.006%.

Two-year yields US2YT=RR, which are sensitive to traders' views on changes in Fed policy, were up 1.80 basis points at 1.866% after hitting a two-month high at 1.968%.

The two-year and 10-year part of the yield curve had narrowed to 10 basis points, the tightest since March 22, before widening back to 13.8 basis points.

U.S. yields were also pulled lower by their German counterparts as traders anticipate the European Central Bank is prepared to embark on more stimulus to foster business activity and inflation across the euro zone.

Moreover, European yields decreased on worries about a possible no-deal Brexit.

Ten-year Bund yields DE10YT=RR hit -0.443%, a record low.

While the U.S. economy is in the middle of its longest-ever expansion, cracks are showing in the manufacturing sector and the inability for inflation to hit the Fed's 2% goal.

The Chicago Purchasing Management Index, also known as the Chicago Business Barometer, fell to 44.4 this month, the lowest level since December 2015 from 49.7 in June.

The poor regional factory figure was offset by a mildly better-than-expected reading on domestic private employment in July from payroll processor ADP.

On the supply front, the U.S. Treasury Department said it will sell as expected $84 billion in coupon-bearing debt next week for its August refunding. It will repay $57.3 billion of proceeds to bondholders and raise $26.7 billion in new cash.

July 31 Wednesday 4:37PM New York / 2037 GMT

Price

US T BONDS SEP9 USc1

155-29/32

41/32

10YR TNotes SEP9 TYc1

127-156/256

9/32

Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

2.0275

2.0719

-0.023

Six-month bills US6MT=RR

2.025

2.0744

-0.014

Two-year note US2YT=RR

99-198/256

1.8661

0.018

Three-year note US3YT=RR

99-204/256

1.8208

0.006

Five-year note US5YT=RR

99-170/256

1.8206

-0.023

Seven-year note US7YT=RR

99-202/256

1.9073

-0.034

10-year note US10YT=RR

103-64/256

2.0075

-0.054

30-year bond US30YT=RR

107-104/256

2.5199

-0.066

YIELD CURVE

Last (bps)

Net Change (bps)

10-year vs 2-year yield

13.80

-7.05

30-year vs 5-year yield

69.70

-3.75

DOLLAR SWAP SPREADS

Last (bps)

Net Change (bps)

U.S. 2-year dollar swap spread

3.75

1.00

U.S. 3-year dollar swap spread

0.50

0.75

U.S. 5-year dollar swap spread

-3.00

0.50

U.S. 10-year dollar swap spread

-7.50

1.25

U.S. 30-year dollar swap spread

-36.75

0.75

(Reporting by Richard Leong Editing by Tom Brown and Chris Reese)

((richard.leong@thomsonreuters.com; +1 646 223 6313; Reuters Messaging: richard.leong.thomsonreuters.com@thomsonreuters.net; Twitter @RichardLeong2))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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