(Bloomberg) -- US Treasuries pared early losses on Monday as traders awaited a hefty week of economic data and speeches from Federal Reserve officials that will likely determine expectations for the central bank’s policy decision later this month.
The market retraced an opening selloff, with longer-dated benchmarks outperforming the front end. The 10-year was 1 basis point higher at 4.18%, while the two-year was up 4 basis points at 4.19% in late morning trade. That pushed the 10-year yield below the two-year rate, leaving the curve inverted in the parlance of traders. A week ago, it ended New York trading inverted for the first time since September.
Yields rose to session highs in morning trading in New York just before release of data that showed ISM manufacturing activity beating forecasts, but with the prices component coming in weaker than expected. The five-year yield rose as much as 9 basis points to near 4.14%, clipping some of the bond market’s late-November rally. The five-year tumbled 25 basis points last week.
A heavy slate of corporate bond offerings contributed to the initial jump in yields on Monday, and reports that last month’s cease-fire between Israel and Hezbollah was fracturing helped spur the reversal, traders said.
The Monday data kicked off a busy week, with the calendar culminating in the November jobs report Friday. Also on the radar for traders are Fed officials speaking Monday including Governor Christopher Waller and New York Fed President John Williams, with Chair Jerome Powell speaking Wednesday.
“The question for every investor with valuations here,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities, is whether a combination of “strong growth, inflation contained to some prices lower, good private sector jobs, and lower rates,” can prevail.
The final Fed decision for this year looms on Dec. 18 and traders currently see a third consecutive rate cut as a coin toss. Traders are pricing in 15 basis points of easing at this month’s decision, or roughly a 60% chance of a quarter-point cut.
The central bank has already trimmed policy by three-quarters of a point to a range of 4.5% to 4.75%, and market pricing for the meetings ahead will hinge on the tone of this week’s labor elements in the manufacturing and services reports, along with Jolts job openings due Tuesday, and ADP private sector hiring on Wednesday.
Pause Foreseen
Traders expect the Fed will likely pause in cutting rates early next year, with 33 basis points of total easing priced into the three meetings through March. The decisions early next year come against the backdrop of the incoming Trump administration, which is seeking stronger economic growth via tax cuts and deregulation, alongside higher tariffs that are seen as inflationary.
Atlanta Fed President Raphael Bostic said on Monday that he’s undecided on whether a rate cut is needed this month.
Patricia Zobel, head of macro and economic research at Guggenheim Investments, said she’s focused on Fed officials’ updated rates projections that come out this month.
“There’s a lot of uncertainty about the appropriate setting of monetary policy and that includes on neutral,” said Zobel, who previously worked for over 20 years at the New York Fed in the markets group.
The greenback got a boost from the higher Treasury yields, with the Bloomberg Dollar Spot Index gaining 0.6%. In Europe, the spread on French debt over its German peers jumped amid ongoing concern that the French government may be toppled.
“We are going to watch a slow-moving locomotive crash shortly in Europe, as sovereign risk gets repriced as French politics explodes,” said John Brady, managing director at RJ O’Brien.
(Updates prices,)
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