US yields plummet after weak data, safe-haven flows

*
U.S. 2-year to 10-year yields fall to six-month lows
*
U.S. 20-year to 30-year bond yields drop to five-month lows
*
U.S. 2-year/10-year yield curve narrows inversion
*
U.S. rate futures price in 75 bps cut in 2024
(Adds new comment, bullets, graphics; updates prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, Aug 1 (Reuters) – U.S. Treasury yields tumbled on Thursday as soft economic data and dovish comments from Federal Reserve Chair Jerome Powell in the previous session cemented expectations that the central bank will finally cut interest rates next month, the first in more than four years.
U.S. two-year to 10-year note yields dropped to six-month lows, below 4%, while those on 20-year and 30-year bonds slid to their weakest level since March.
Treasuries, a market where prices move inversely to yields, also benefited from safe-haven flows amid geopolitical stress in the Middle East.
The head of Hamas’ military wing, Mohammed Deif, was killed in an Israeli airstrike in Gaza last month, the
Israeli military said
on Thursday, a day after the group’s political leader Ismail Haniyeh was killed in Tehran.
Deif is believed to have been one of the masterminds of Hamas’ Oct. 7 attack on southern Israel.
“It’s not just the weak data, but we’re seeing some safe-haven trades going on due to increased MidEast tension,” said Kim Rupert, managing director for fixed income at Action Economics in San Francisco.
“There was also bullish momentum after the 4% yield was penetrated. To some extent, there’s so much FOMO (fear of missing out) going on, like get the 4% coupon, before it falls further,” she added.
And then there’s the Fed. It held steady the benchmark overnight rate to a target range between 5.25%-5.50% on Wednesday, while Fed Chair Jerome Powell opened the door for a September rate cut, noting that price pressures were now easing broadly in the economy and calling it “quality” disinflation.
Thursday’s data showing further contraction in the U.S. manufacturing sector and a decline in construction spending further solidified the September easing.
That said, Jeff Klingelhofer, co-head of investments and portfolio manager at Thornburg Investment Management in Santa Fe, New Mexico, pointed out that it would be a mistake for the market to assume that the Fed is going to cut every meeting going forward.
“What the Fed is trying to set up here is that there is a better balance of risks and it’s probably prudent at this point after cutting in September … to proceed gradually and cautiously at that point.”
The rate futures market has priced in about 75 basis points (bps) of easing this year, LSEG calculations showed, equivalent to three cuts of 25 bps each. The market, however, has increasingly priced in chances of a 50 bps cut in September, now at 19%, from 12.5% on Tuesday.
MULTI-MONTH LOWS
In afternoon trading, the benchmark 10-year yield sank 12 bps to 3.985%, on track for its largest daily fall since mid-December. Earlier, it fell to a six-month low of 3.965%.
On the front end of the curve, the two-year yield, which reflects interest rate expectations, was down 15.1 bps at 4.173% , after earlier sliding to its weakest level since early February. It was on track for its biggest daily decline since December 13.
Treasury yields extended their fall after a slew of weak data that started with U.S. jobless claims increasing 14,000 to a seasonally-adjusted 249,000 for the week ended July 27, the highest since August last year.
In addition, a measure of U.S. manufacturing activity dropped to an eight-month low in July amid a slump in new orders. The Institute for Supply Management (ISM) said its manufacturing PMI dropped to 46.8 last month, the lowest since November, from 48.5 in June. A PMI reading below 50 indicates contraction in the manufacturing sector.
U.S. construction spending also showed softness, unexpectedly falling 0.3% in June, after a downwardly revised 0.4% decline in May. Economists polled by Reuters had forecast construction spending rising 0.2%.
In other parts of the bond market, the closely-watched U.S. two-year/10-year yield curve narrowed its inversion, or steepened, to minus 20 bps.
The curve on Thursday is in a bull-steepening phase, in which short-dated rates are falling more sharply than longer-dated ones. Yield curves in general steepen ahead of the Fed easing cycle, with investors pricing in lower yields on the front end. A steeper curve shows higher longer-dated yields than those on shorter maturities, reflecting a normal upward slope.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick Zieminski and Diane Craft)