Despite Receding Supply Concerns, Treasury Yields Hold Steady

Treasury yields saw little change on Tuesday morning as concerns over the supply of U.S. government debt eased following the Treasury Department's downward revision of its third-quarter borrowing estimate.

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Key Developments

• 2-Year Treasury Yield: Slightly increased to 4.389% from 4.385% on Monday, which was the lowest since February 2.
• 10-Year Treasury Yield: Fell marginally to 4.173% from 4.176% on Monday, marking the lowest since July 17.
• 30-Year Treasury Yield: Decreased by 1 basis point to 4.420% from 4.430% on Monday, the lowest since July 18.

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Market Drivers

Traders were still reacting to the Treasury Department's announcement on Monday, which significantly lowered its third-quarter borrowing estimate to $740 billion, a reduction of over $100 billion from the previous estimate three months ago.

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According to BMO Capital Markets strategists Ian Lyngen and Vail Hartman, "Supply angst has receded for the moment." They also noted that the primary market for Treasuries has been strengthening in recent months, as it becomes apparent that the next global trend in monetary policy will be towards lower rates.

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Economic Data

• Consumer Confidence: The Conference Board’s consumer-confidence index rose to 100.3 in July but remained within the narrow range seen over the past two years.
• Job Openings: Slightly decreased to just under 8.2 million in June.
• Home Prices: In the 20 largest U.S. metropolitan areas, home prices reached a new record high in May but showed signs of slowing down.

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Federal Reserve Outlook

The Federal Reserve is set to announce its next policy decision on Wednesday. According to the CME FedWatch Tool, Fed-funds futures traders are pricing in a 95.9% probability that the central bank will maintain interest rates between 5.25% and 5.5%. There is also a 100% chance of at least a quarter-point rate cut by September, including a 10% chance of a larger half-point reduction.

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BofA Securities strategist Mark Cabana and his team wrote in a note, "We expect the Fed to keep its policy rate unchanged in July while signaling progress on reducing inflation has resumed."

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They further explained that while the Fed is optimistic about near-term rate cuts, it is unlikely to indicate that a September cut is certain. "It could happen, but it will depend on the data. We look for Chair [Jerome] Powell to indicate that the Fed’s singular focus on inflation has shifted in favor of a more balanced reaction function — cuts can happen because the economy cools, because inflation slows, or both," the BofA team added.

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The steadying of Treasury yields reflects a temporary easing of supply concerns following the Treasury Department's borrowing estimate revision. Economic indicators such as consumer confidence, job openings, and home prices provide mixed signals about the health of the economy. Meanwhile, market participants are closely watching the Federal Reserve's upcoming policy decision, with a high probability that interest rates will remain unchanged in the immediate term but a potential rate cut on the horizon depending on future economic data.

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