10-year Treasury yield books largest daily decline in over a month

U.S. Treasury yields fell on Tuesday after February ISM data showed the growth in the services industry slowed a bit last month, a welcome sign on the inflation front as investors awaited testimony from Federal Reserve Chair Jerome Powell and February jobs data later this week.

What happened

  • The yield on the 2-year Treasury
    fell by 5.6 basis points to end at 4.550%.

  • The yield on the 10-year Treasury
    dropped 8.2 basis points to 4.136%. Tuesday’s move was the biggest one-day yield decline for the 10-year note since Feb. 1, according to Dow Jones Market Data.

  • The yield on the 30-year Treasury
    was off 8.1 basis points, to 4.273%.

What drove markets

Treasury yields declined on Tuesday after February service-sector data showed cooling inflationary pressures.

The Institute for Supply Management said on Tuesday that its service-sector index fell to 52.6% in February from 53.4% in the prior month.

Numbers over 50% indicate expansion in the economy, but the monthly decline was bigger than expected, as economists polled by the Wall Street Journal had expected the index to inch lower to 53.1% last month.

Meanwhile, a risk-off tone across global financial markets also encouraged buying of U.S. government debt on Tuesday, with traders also eyeing potential catalysts in coming sessions.

Powell will deliver testimony to Congress on Wednesday and Thursday, which together with Friday’s publication of the February nonfarm payroll report may cement expectations regarding the likely trajectory of Fed policy.

On Tuesday, markets priced in a 97% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on March 20, according to the CME FedWatch tool.

The chances of at least a 25-basis-point rate cut by the subsequent meeting in May was priced at 20.3%, down from 62.3% just a month ago. The chances of at least a 25-basis-point cut in June were priced at 58.9%.

The central bank is expected to take its fed-funds rate target back down to around 4.57% by December 2024, according to 30-day Fed Funds futures.

What analysts said

“Given the persistent inflationary pressures, accommodative financial conditions, steady economic growth, and robust labor market conditions, it is reasonable to expect a more hawkish tone from Federal Reserve Chair Jerome Powell. However, it’s challenging to envision a substantial departure from the recent guidance provided by other policymakers,” said Stephen Innes, managing partner at SPI Asset Management.

“Hence, Powell’s messaging reflects a balanced approach, acknowledging the need for vigilance on inflation while emphasizing the importance of supporting economic recovery. Any shift in policy stance would likely be gradual and cautious, considering the uncertainties in the economic outlook and the potential impact of monetary policy adjustments,” Innes added.

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