Treasury Yields Drop as Traders Wait for Fed Rate Cut

Market Movements and Investor Sentiment

U.S. Treasury yields saw a decline following the release of the New York Fed’s regional business survey, which revealed a worse-than-expected result for September. This led to a rally in Treasurys, with traders focusing on the upcoming Federal Reserve meeting on Wednesday, where an interest-rate cut is anticipated. The benchmark 10-year yield closed at 4.034%, while the 2-year yield ended at 3.534%. Investors are closely watching for signals from the central bank regarding future rate cuts.

Bond Markets Remain Calm Amid Global Developments

Despite France’s recent credit rating downgrade by Fitch Ratings, bond markets have not shown significant panic. French 10-year government-bond yields have increased slightly as investors demand a higher risk premium due to concerns about the country's fiscal deficit. However, these yields remain well below levels seen during the sovereign debt crisis. The French 10-year yield is currently at 3.416%, reflecting a modest increase.

U.S. Treasurys Steady Ahead of Key Events

As the market approaches the Federal Reserve’s anticipated rate cut on Wednesday, U.S. Treasury yields have remained steady or slightly lower. Investors are hesitant to take new positions ahead of the decision, waiting for any shifts in inflation dynamics or Fed guidance. The two-year Treasury yield is down less than 1 basis point at 3.551%, while the 10-year yield is down 1 basis point at 4.059%.

Anticipation of Rate Cuts Influences Market Behavior

In European trade, U.S. Treasury yields rose slightly, continuing to recover from recent lows driven by signs of labor market weakness. Money markets indicate that a 25-basis-point interest-rate cut is fully priced in, with only a small chance of a larger 50-basis-point cut. The two-year yield rose 0.8 basis point to 3.565%, and the 10-year yield increased by 2.3 basis points to 4.083%.

Outlook for U.S. Treasury Yields

Analysts from DZ Bank Research suggest that anticipated rate cuts by the Federal Reserve may not push 10-year U.S. Treasury yields lower. Instead, they expect yields to rise in the coming months. This prediction is based on factors such as potential inflationary pressures from tariffs under the Trump administration, with the 10-year Treasury yield expected to reach 4.40% within three months.

Long-End Treasurys Face Continued Weak Demand

Citi Research strategists anticipate that demand for long-end U.S. Treasurys will remain weak in the coming months. This is attributed to the expected slow pace of interest-rate cuts and political pressures on the Federal Reserve. These factors are likely to limit investor interest in longer-term bonds.

Japan’s Debt Auctions Under Scrutiny

Japan’s upcoming auction of 800 billion yen in 20-year sovereign debt is drawing attention amid political uncertainty. The resignation of Prime Minister Ishiba has raised questions about the future of the ruling coalition and potential fiscal expansion. Analysts from Barclays note that this auction could serve as a gauge of investor demand in the superlong sector, with the current yield on 20-year JGBs at 2.640%.