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Bond yields fell on Monday after weak economic data from Europe and as traders await central bank policy decisions this week.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.824%
slipped by 2.1 basis points to 4.837%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.800%
retreated 2.3 basis points to 3.818%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.871%
fell 1.7 basis points to 3.888%.
What’s driving markets
Treasury yields are tracking declines for equivalent European paper
TMBMKDE-10Y,
after data released Monday showed economic activity in the eurozone at an eight-month trough in July.
The slowdown suggests recent interest rate rises by the European Central Bank — alongside slowing demand from China — may be taking their toll.
The European Central Bank will deliver its monetary policy decision on Thursday, a day after the Federal Reserve is expected to tighten policy further as it continues to battle inflation that remains 1 percentage point above its 2% target.
Markets are pricing in a 99.8% probability that the Fed will raise interest rates by 25 basis points to a range of 5.25% to 5.50% after its meeting on Wednesday, according to the CME FedWatch tool.
The chances of a further 25 basis point rate rise after the September or November meetings are priced at 16% and 28%, respectively.
The central bank is not expected to take its Fed funds rate target back down to around 5% until May 2024, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Monday include the S&P “flash” U.S. manufacturing and services PMIs for July, due at 9:45 a.m. Eastern.
What are analysts saying
Strategists at Deutsche Bank gave their assessments of what to expect from central banks this week.
“The key for this meeting is if and how much the Fed messaging changes given recent softer inflation data. Our economists in their preview here, suggest that there is little downside at this stage for the Fed to do anything other than maintain a hawkish bias even if they acknowledge the progress.”
“Our European economists expect the ECB to deliver a +25bps hike, taking the deposit rate to what they see as a terminal level of 3.75%, even if they see a hike in September as a genuine possibility. Aside from the ECB meeting, the Eurozone bank lending survey tomorrow is important in order to see how lending standards have moved from what are currently tight and restrictive levels.”
“The Bank of Japan will close out the busy week for central banks with a decision on Friday and will also release their quarterly Outlook Report. Our Chief Japan economist previews the meeting here and sees some policy revision as a c.40% probability event, but continues to expect no change in monetary stance as his baseline.”
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