By Harry Robertson and Ankur Banerjee
(Reuters) – U.S. Treasury yields fell on Monday as traders priced in deep interest rate cuts from the Federal Reserve, while weak employment data fueled concerns the U.S. economy is heading for a recession.
The two-year U.S. Treasury yield, which is sensitive to Fed rate expectations, fell to 3.691% in European trading, the weakest level since May last year. The yield was last down 10 basis points (bps) at 3.77%.
The yield, which moves inversely with price, fell 53 basis points last week.
Friday’s nonfarm employment figures, which showed the U.S. unemployment rate unexpectedly rose in July and job growth slowed, followed a series of disappointing earnings results from major technology companies that sparked a global stock selloff and sent investors fleeing to safe havens.
Investors are also dealing with a dramatic rally in the Japanese yen that has rattled the country’s markets, sending the Nikkei 225 stock index down 12.4% on Monday, its biggest one-day drop since 1987. U.S. S&P 500 futures fell 2.7%.
The yield on the benchmark US 10-year Treasury note fell 5 basis points to 3.742%, after hitting a one-year low of 3.678% earlier in the session. The yield fell nearly 40 basis points last week, the biggest weekly decline since March 2020.
Michael Weidner, co-head of global fixed income at Lazard Asset Management, said the rally in bond markets was amplified by investor concerns about their positions in technology stocks and by weak markets over the summer.
“The movement of the last two days is not so much a result of fundamental factors, but more of the correction in the US stock markets,” he said.
“We still believe that a soft landing (for the economy) is more of a base case scenario.”
Markets now expect US interest rates to be cut by about 125 basis points this year, compared with about 90 basis points on Friday and 50 basis points early last week.
Based on prices in the derivatives market, traders now believe a 50 basis point rate cut in September is all but certain.
The closely watched US 2-10-year yield curve showed a smaller inversion, to 2 basis points, the lowest level since July 2022, reflecting expectations of a sharp decline in short-term interest rates.
(Reporting by Harry Robertson in London and Ankur Banerjee in Singapore; additional reporting by Chibuike Oguh in New York; editing by Kirsten Donovan)
