Hiring Gauge Spurs Treasury Yields to Major Two-Day Drop

(Bloomberg) — A global bond rally gathered pace Tuesday, with some Treasury benchmark yields registering their largest two-day declines this year, amid signs of a cooling US economy.

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A slide of at least 15 basis points so far this week was the story for five, 10-, and 30-year Treasury yields. Sparked by weakness in a manufacturing gauge Monday, the rally was revived by a bigger-than-expected slide in US job openings Tuesday. Yields were near session lows last seen in mid-May during New York afternoon trading.

The 10-year note’s yield at about 4.33% is down 16 basis points from Friday’s closing level, its biggest two-drop since December. The catalyst for Tuesday’s move was April JOLTS job openings tumbling to the lowest level in over three years and the March tally being revised lower.

The data prompted traders to price in higher odds of Federal Reserve interest-rate cuts beginning as soon as November. Fed officials have an opportunity to influence expectations via their communications after their next meeting ending June 12. In the meantime, the US employment report for May to be released Friday and May inflation data will inform their deliberations.

“The narrative of the market has switched from an inflation one to a growth one,” said Nicolas Trindade, a senior portfolio manager at AXA Investment Managers. “That’s made us more positive on US Treasuries.”

Still, buyers remain vigilant after a selloff last week pushed yields to the highest levels in months, spurred by faster-than-expected inflation data that’s testing conviction in the outlook for Fed rate cuts.

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.

The job openings weakness “doesn’t indicate near-term action is needed, but it helps the case for a September cut,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets. The 10-year note’s yield is likely to test 4.309%, the low end of its range since April 2, he said. It tumbled 11 basis points on Monday after the Institute for Supply Management’s manufacturing gauge for May fell unexpectedly.

Money markets see 44 basis points of easing by year from the Fed, equivalent to one quarter-point cut. 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.

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The falling price of oil is also boosting the appeal of bonds. WTI crude futures fell 1.3% to a nearly four-month low 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 were reflected in other bond markets. The German 10-year benchmark yield fell 13 basis points from Friday’s close to 2.53%, 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.”

ECB Rate-Cut Expectations Start to Unravel Before First Move

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.”

–With assistance from Alice Gledhill, Ruth Carson, Matthew Burgess and Liz Capo McCormick.

(Adds investor comment, updates yield levels.)

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