A global bond rally continued, sparked by signs the world’s biggest economy is cooling, ahead of the crucial next read on the state of the US labor market.
Treasury 10-year yields declined for a fourth-straight day after sliding 11 basis points on Monday, when a report showed US factory activity shrank in May and output came close to stagnating. US job openings data to be released at 10 a.m. New York time are expected to show hiring slowed for a second month in April, which could add to the case for a Federal Reserve interest-rate cut as soon as November.
Still, buyers remain vigilant after a selloff last week. While yields are near the highest they’ve been in months, faster-than-expected inflation data is testing the market’s conviction in just how much policymakers can lower borrowing costs this year.
Central bankers including Fed Chair Jerome Powell have repeatedly stressed the need for more evidence that inflation is on a sustained path to the 2% goal before cutting interest rates.
“US Treasuries continue to look attractive as the US economy is slowing more than others in the developed world,” strategists at Pictet Asset Management wrote in a note. Since “inflation is proving sticky,” the firm has a preference for US inflation-protected bonds which look more attractively priced.
Money markets see 42 basis points of easing by year from the Fed, equivalent to one quarter-point cut and just under 70% likelihood of a second. That compares to just 30 basis points of cuts as recently as Wednesday, according to swaps. Traders Tuesday resumed fully pricing in an initial cut in November; previously, December contracts were the earliest ones to fully price in a quarter-point move.
The falling price of oil is also boosting the appeal of bonds. Brent extended losses from the lowest settlement in almost four months after OPEC+’s plan to return barrels to the market earlier than expected raised concerns about oversupply.
“Whilst the ISM was the main catalyst for yesterday’s moves, they got fresh momentum thanks to the latest decline in oil prices,” said Deutsche Bank AG strategist Jim Reid. Oil prices had already been trending lower since early April, as geopolitical risks ebbed and demand showed signs of faltering.
US Treasury gains on Monday spurred advances across other major markets. The German 10-year benchmark yield is down 13 basis points since Friday’s close at 2.54%, just days after touching its highest level this year. While the European Central Bank is all but certain to cut rates by 25 basis points this week, doubt over further moves is rife with inflation yet to be fully tamed.
“I don’t think they really need to be cutting — the data’s not really rolling over,” said Rob Burrows, a portfolio manager at M&G Investments. “It does seem that they’ve almost boxed themselves into a bit of a corner. The likelihood is that the first cut will be followed up with some hawkish rhetoric.”
Yields on Australian and New Zealand 10-year bonds fell about seven basis points, while Japan’s 10-year notes retreated three basis points to 1.02%.
“Levels had gotten cheap last week,” said Martin Whetton, head of markets strategy at Westpac Banking Corp. “Lately it has been a challenge to string two consecutive days of gains for fixed-income markets together but we’ve just had them.”
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