On Expectations of Aggressive Fed Easing, Treasury Yields Fall to Their Lowest Levels in Over a Year

Yields on U.S. government debt continued their sharp decline on Monday morning due to growing concerns about a possible U.S. recession and the expectation that the Federal Reserve might need to aggressively cut interest rates, potentially even on an emergency basis.

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The yield on the 2-year Treasury dropped to 3.726%, a decrease of 14.5 basis points from Friday’s 3.871%. This marks the lowest level for the 2-year yield since at least May 4, 2023. The 10-year Treasury yield fell to 3.676%, down 11.9 basis points from Friday’s 3.795%, reaching its lowest point since at least June 6, 2023. Similarly, the 30-year Treasury yield decreased to 4.003%, down 10.8 basis points from Friday’s 4.111%, hitting its lowest level since at least December 28.

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These drops in Treasury yields followed significant declines from the previous week, which saw the 2-year Treasury yield fall by almost 52 basis points and the 10-year rate decrease by 40.4 basis points.

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Marc Chandler, chief market strategist at Bannockburn Global Forex, mentioned increasing speculation about an emergency interest rate cut by the Federal Reserve. Prior to the weekend, there was heightened discussion about a potential 50 basis point cut in September.

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In his note titled “Risks to Financial Stability Fan Speculation of Emergency Rate Cuts,” Chandler wrote that the term “Black Monday” had become relevant again, triggered by declines in Asian stock markets. This decline continued as U.S. stock markets tumbled during morning trading in New York. This market downturn prompted a flight to the relative safety of fixed income assets, leading to falling yields in Asia, Europe, and the U.S.

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With some market participants now expecting the Federal Reserve to cut interest rates sooner than previously anticipated, Daniel Krieter, a strategist at BMO Capital Markets, explained that "panic in financial markets, indicated by the unusual speculation of an emergency rate cut by the Fed, can become self-reinforcing, especially in the thin trading environment of August."

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The significant drop in Treasury yields on Monday morning reflects escalating worries about a potential U.S. recession and the likelihood that the Federal Reserve may need to implement aggressive interest rate cuts. The 2-year, 10-year, and 30-year Treasury yields have all fallen to their lowest levels in months, driven by market fears and speculation about emergency actions by the Fed. This situation has created a feedback loop of panic within financial markets, exacerbated by low liquidity during the August trading period.

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