(Bloomberg) -- US Treasuries advanced after a weaker-than-expected gauge of service-sector activity boosted bets the Federal Reserve will cut interest rates this month.
The rally left yields lower by at least four basis points across the curve. The two-year note’s yield erased an increase of three basis points and fell by more than six basis points to 4.11%, the lowest since Nov. 1. Prices peaked in late trading after a buyer-initiated futures block trade in the Ultra 10-year contract.
Unscripted comments by Fed Chair Jerome Powell at a conference in New York appeared to cause a brief setback. He said the US economy was “stronger than we thought it was going to be in September,” with inflation somewhat higher, considerations that mean the Fed “can afford to be a little more cautious” in lowering rates.
“Powell’s speech really didn’t give the markets much to chew on,” said Gennadiy Goldberg, head of US interest rate strategy at TD Securities. “It sounds like the Fed will keep all options on the table for December, but we still expect them to coalesce around another rate cut.”
With just two weeks remaining before the Fed’s next policy decision on Dec. 18, the outlook for another quarter-point rate cut remains uncertain. Comments by Fed policymakers earlier this week broadly showed support for additional cuts, tempered by awareness of the risks of acting too quickly.
St. Louis Fed President Alberto Musalem, speaking before Powell Wednesday, said pausing cuts may be appropriate as soon as this month, as the risks of cutting borrowing costs too quickly are greater than those of easing too little.
Before the Dec. 18 meeting, Fed officials will see at least two additional pieces of economic data that could alter their course — November’s employment report on Friday and consumer price index next week.
Earlier Wednesday, Treasury yields retreated from near session highs after the ISM services index for November fell more than expected, as did its employment component. Also Wednesday, the ADP Research Institute’s gauge of private-sector job growth in November was weaker than economists estimated.
“The ISM services report certainly surprised to the downside, but I think the market will take more cues from payrolls, and a firmer print as we expect could push yields higher once again,” said TD’s Goldberg. “Investors are firmly in a ‘wait and see’ mode.”
The Fed cut rates by a half-point in September and a quarter-point last month, and the market-implied odds of another quarter-point cut this month have improved to around 70%. Additionally, a cumulative 80 basis points of easing is priced in by the end of next year.
Mounting expectations for a December rate cut have driven a benchmark for US dollar interest-rate volatility to the lowest level in four months.
--With assistance from Edward Bolingbroke.
(Updated prices and added block trade in second paragraph.)
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