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U.S. Treasuries 10-year yield hits four-month low on weak data, Pelosi’s Taiwan visit

By: Gertrude Chavez-Dreyfuss

U.S. Treasury yields slid on Monday in thin, choppy trading, with the benchmark 10-year yield hitting a four-month low, as manufacturing and construction data pointed to a slowdown that could prompt the Federal Reserve to slow its interest rate increases.

U.S. House of Representatives Speaker Nancy Pelosi was set to visit Taiwan on Tuesday, three people briefed on the matter said. That also spurred a flight-to-quality bid for Treasuries, analysts said. China warned that its military would never “sit idly by” if she were to visit the self-ruled island claimed by Beijing.

Overall, U.S. yields have dropped off from overnight highs, but the way Treasuries have traded since the Fed policy meeting last week suggested that U.S. rates may have peaked for now as the economy loses momentum.

Monday’s data showed U.S. manufacturing activity slowed less than expected in July, with the Institute for Supply Management’s (ISM) index of national factory activity dipping to 52.8 last month, the lowest reading since June 2020.

U.S. construction spending also declined in June, down 1.1%, as outlays on single-family homebuilding declined sharply amid rising mortgage rates.

“U.S. rates are lower because the economy is slowing. The tightening of financial conditions from the Federal Reserve, which really started in late 2021, is starting to flow through the broader economy,” said Gregory Faranello, Head of U.S. Rates at AmeriVet Securities in New York.

“We can debate about recession or no recession. Anytime there’s a question on recession, (Treasury Secretary Janet) Yellen and (Fed Chair Jerome) Powell point to the employment market. So I don’t think the Fed is finished raising rates yet,” he added.

The Fed last week delivered its second straight 75 basis point rate increase, but Powell said the central bank could slow the pace of its rate increases in the coming months if there is evidence that tighter monetary policy is taming the worst U.S. inflation in four decades.

Tom di Galoma, managing director, at Seaport Global Holdings in Greenwich, Connecticut, said the market is underpricing how aggressive the Fed will be in containing inflation.

“I know a lot of analysts saw a little bit more of a pivot from where he (Powell) had been. I think the Fed has nothing more but rate hikes in the future. I don’t think there’s any way they can contain inflation,” he said.

In afternoon trading, the benchmark U.S. 10-year yield fell nearly 4 bps to 2.6073% US10YT=RR after earlier dropping to 2.586%, the lowest since early April. Since hitting an 11-year high of 3.4980% in mid-June, the 10-year yield has declined by more than 90 bps.

The two-year US2YT=RR U.S. Treasury yield, which typically tracks interest rate expectations, was flat at 2.9126%.

A closely-watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR was inverted at -30.6 basis points.

An inversion of this yield curve typically foreshadows recession.

U.S. 30-yields were down nearly 5 bps at 2.9286% US30YT=RR, after earlier sliding to 2.925, the lowest since late May.