Treasury yields slipped on Wednesday after a worse-than-expected ISM manufacturing gauge heightened concerns around the sluggish industrial sector.
Investors also looked ahead to the Federal Reserve’s policy update, where it is expected to leave rates on hold.
What are Treasurys doing?
The benchmark 10-year Treasury note yield TMUBMUSD10Y, -0.76% fell 2.5 basis points to 2.482%. The 2-year note yield TMUBMUSD02Y, +0.18% was down 0.8 basis point to 2.260%, while the 30-year bond yield TMUBMUSD30Y, -0.97% fell 3.7 basis points to 2.900%. Bond prices move inversely to yields.
What’s driving markets?
Yields fell sharply after April’s ISM manufacturing index came in at 52.8%, well below analysts’ expectations of 54.7%, showing the U.S.' s industrial sector is still feeling the drag from an global trade slowdown. Any reading above 50 represents growth in economic activity, while a number below that level indicates contraction.
On a more positive note, Automatic Data Processing reported private sector employment grew 275,000 in April, from 151,000 in April.
The Fed’s interest-rate setting body will conclude its meeting and issue a policy statement at 2 p.m. Eastern time, followed by a news conference helmed by Chairman Jerome Powell at 2:30 p.m. Analysts will closely watch for any comments on the recent slide in inflation, with core personal-consumption expenditures standing at 1.6% on a yearly rate.
The recent softness in inflation has sparked speculation among bond-market bulls that the central bank could push for a rate cut soon despite first-quarter economic growth remaining robust.
See: After a sterling first-quarter GDP number, rate-cut bets gain steam. What gives?
Read: Powell has to walk verbal tightrope as market could pounce on interest-rate clues in either direction
What did market participants say?
“Could the Fed cut rates just on inflation under-performance? We do not believe so,” wrote Stephen Gallagher, chief U.S. economist for Société Générale.
“Eventually the Fed could be motivated on inflation alone, but the undershoot on inflation is too modest and too recent for the Fed to send strong signals,” said Gallagher.
“There’s every reason for the Fed to stay in place right now,” said Jason Thomas, chief economist at AssetMark.
What else is on investors’ radar?
The Treasury Department kept sizes of its debt auctions unchanged for the third-quarter, and will sell $84 billion of Treasury notes and bonds this week. The U.S.’s burgeoning fiscal deficits have been cited as a risk to the bond market, but so far domestic and foreign bond buyers have lapped up U.S. government paper as global growth fears stoke demand for haven assets.
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