In Anticipation of Fed Rate Cuts, Treasury Yields Decline to a One-month Low

Monday morning saw Treasury yields maintaining stability, with traders closely monitoring upcoming auctions and developments in the Middle East.

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At 4.802%, the yield on the 2-year Treasury remained largely unchanged compared to Friday's 4.804% at 3 p.m. Eastern time. Conversely, the yield on the 10-year Treasury slipped slightly by less than 1 basis point to 4.493% from Friday's 4.498%, while the yield on the 30-year Treasury remained relatively steady at 4.663% versus 4.661% on Friday afternoon. It's worth noting that bond yields move inversely to prices.

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In the realm of market drivers, bond traders were attentive to two key factors unfolding in the United States and the Middle East, especially in anticipation of this week's government auctions.

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Firstly, attention was drawn to the previous week's underwhelming jobs report and the dovish remarks made by Fed Chair Jerome Powell. These developments have heightened the likelihood of multiple rate cuts by the Federal Reserve before the year's end.

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Notably, as of Monday morning, interest-rate futures traders were predominantly factoring in two rate cuts by December. This represents a shift from one week ago when expectations were leaning towards only one cut, according to the CME's FedWatch Tool. Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income, emphasized the eagerness among investors to enter the market and seize yields before the Fed commences rate reductions.

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Secondly, the surge in oil prices grabbed attention, particularly as Israel hinted at an impending invasion of Rafah in Gaza. This development sparked a flight-to-quality bid in government debt overnight.

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Looking forward, traders anticipate a relatively subdued week, devoid of major economic data releases. Consequently, the focus will be on Treasury auctions, with sales of $58 billion in three-year notes scheduled for Tuesday, $42 billion of 10-year notes for Wednesday, and $25 billion of 30-year bonds for Thursday.

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Commenting on these dynamics, BMO Capital Markets strategists Ian Lyngen and Vail Hartman highlighted the resurgence of geopolitical tensions, specifically citing reports of Israel advising Gazans to evacuate Rafah ahead of an anticipated strike. They noted a predisposition to emerge from the auction process with a long position, acknowledging the susceptibility of the U.S. rates market to external developments, as evidenced by the impact of Middle East tensions on overnight trading sessions.

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